Part 2: Income and Adjustments
Mar 08 '00
Note: All line numbers are on form 1040. As anyone can file a form 1040 (except non-resident aliens who must file a 1040-NR), I will not discuss the relevant lines on form 1040A or 1040EZ.
This epinion deals with lines 7-33 of form 1040, with the exception of business and hobby income, and some employement-related, and business expenses.
Line 7: Wages.
(Most of this section has more to do with avoiding audits than with overlooked deductions; however, wait for some actual deductions.)
In general, you just add the amounts in box 1 of your W-2's. Additional amounts that must be include here are:
Wages received as a household employee, which were not reported on a W-2 because your employer paid you less than $1,100 in 1999. (You do report your household employees, don't you?)
Tip income you did not report to your employer, and allocated tips (from box 8 of your W-2).
Dependent care benefits (box 10 of your W-2), as processed through form 2441, the child care tax credit (see another epinion).
Employer-provided adoption benefits (box 13 code T), as processed through form 8839, the adoption credit.
Scholarship and fellowship grants not reported on a W-2; provided that, if you are a degree candidate, you can exclude tuition and course-related expenses, but not living expenses.
Excess salary deferrals. This can be complicated, but, in general, if you have more than $10,000 (for 1999) in 401(k)-like plans, totalled over all employers, you must include the excess on line 7.
Disability pensions shown on 1099-R if you have not reached the minimum retirement age.
Corrective distributions (see Excess salary deferrals, above) reported on form 1099-R. IRA distributions of any flavor are reported on line 15.
If you were a Statutory Employee (if the box in box 15 of your W-2 was checked), then the "wages" go to schedule C, instead of line 7. (They are exempt from self-employment tax, however). Further discussion will be made in another epinion, on business and hobby income.
If you don't have a W-2, ask your employer. If he's gone, or refuses, you can request a substitute W-2 from the IRS. If your employer insists you are an independent contractor and gives you a form 1099-MISC, and he/she is clearly wrong, file a form 4137, as you would if you had received tips.
Lines 8-9: Interest and dividend income on schedule B.
For the most part, report what you get on forms 1099-INT and 1099-DIV.
However, if there is interest reported which you could not access because the financial institution was insolvent, you can exclude that. If you receive a 1099-INT for a US savings bond, and had previously included the interest as it accrued, you can subtract it here. If you cashed series EE or I savings bonds and paid higher education expenses for yourself, your spouse, or your dependents, you may be able to exclude part of the interest.
If you received interest or dividends which really belong to someone else, you can subtract the amount that belongs to the other persons, but you must file a nominee 1099 by February 28. (Yes, it's February 28, even in leap years.)
Line 10 : state income tax refunds.
You include this only if you itemized deductions in the year the tax was paid, and it affected your taxable income. This is a common mistake (according to the IRS).
Line 11 (alimony received) and line 31 (alimony paid):
Pretty much self-explanatory, except that child support and property settlements are not alimony.
I'm going to skip line 12 and schedule C; rental income/expenses on line 17 and the front of schedule E; line 18 and schedule F, and hobby income on line 21 at this time.
Line 13 and schedule D: Capital gain or (loss). Just follow the instructions carefully, and nobody gets hurt. If you get a form 1099B, be sure to report the sale in the proper section. I will add here that if you qualify for the $250,000/$500,000 exclusion for the sale of your main home, be sure to fill out schedule D, even if the net amount is $0. For the exclusion, you must have owned the home for 2 years (actually, 730 days) of the 5 years preceding the sale, and lived in the home for 2 years of the 5 years preceding the sale; and post-enactment (May 5, 1997) depreciation is not excludible. If you have such depreciation, you will need to file form 4797.
I refuse to deal with line 14 and form 4797; this can get very complicated, but it generally makes gains on sale of business assets capital gain (transferred to schedule D), but losses become ordinary losses.
Lines 15-16: just make sure to report the total distribution as reported to you on the 1099-R in box a, and correctly calculate the taxable amount in box b. NOTE: IRA rollovers that you take as a distribution and carry to a new IRA must be completed within 60 days, or
you may have both the premature distribution and excess contribution penalties.
Line 17: I'll deal with rental deductions under business and hobby deductions. For royalties, partnerships, S corporations, and trusts on the back of schedule E, if simply following the instructions doesn't work, you need a tax advisor.
Line 19: Unemployment compensation is taxable, but is not earned income (for IRA deductions and the earned income credit).
Line 20: Social Security income. Just follow the instructions, and remember that this isn't earned income either.
Line 21: The most common entries here are hobby income (deferred to another Epinion), income from the rental of personal property, gambling income (but remember that gambling losses are deductible (to the amount of gambling winnings) as miscellaneous itemized deductions not limited by the 2% floor), game show winnings (remembering that the value they put on the prize is not necessarily what goes here -- it's the fair market value of the prize that goes here), and refunds of previously deducted expenses (see line 10 above), and jury duty fees.
Line 23: IRA deduction.
Note that this applies only to "traditional IRAs", the IRA deduction is limited to total positive earned income, to $2,000 per person, and may be further limited if you (or your spouse) is covered by a retirement plan and your modified adjusted gross income (MAGI) exceeds a certain amount. That amount is $31,000 if filing status is single, head of household, or married filing separately and living separately from your spouse for the entire year; $51,000 if married filing jointly (or Qualifying Widow(er)) and you have the pension plan, and $160,000 if married filing jointly and your spouse has the pension plan.
Advice: Don't make a nondeductible traditional IRA contribution. If you must make a nondeductible IRA contributions, contribute to a Roth IRA.
Line 24: Student loan interest deduction.
The deduction is limited to $1,500, and can be further limited if your MAGI exceeds $40,000 (single, HoH, QW) or $60,000 (MFJ).
Line 25: Medical savings account deduction. I've never used or studied this one. If you qualify, you are probably already aware of it.
Line 26: Moving expenses.
Generally, you can deduct actual moving expenses for yourself and your goods, if you move in connection with a new job, and the new workplace must be a least 50 miles farther from your old home than your old workplace. In addition, you must work 39 weeks in the next year in the new location if for an employer, and 78 weeks in the next 2 years if self-employed.
Line 27: One-half of self-employment tax.
Just copy one-half of line 50 to line 27. The IRS will probably catch this if you forget, but, it's better to do it right the first time.
Line 28: Self-employed health insurance deduction.
I should only discuss this under business deductions, but the rules are nearly simple enough to do it here. The amount is the lesser of 60% of health insurance for you, your spouse, and your dependents, where the plan was established through your business, and during those months in which you were not eligible for any employer-subsidized health plan; and your net profit and other earned income.
Line 29: It's basically self-employed pension plan deductions. You'll need a tax advisor in order to set up the plan, so I don't need to go into the rules here.
Line 30: Penalty on early withdrawal of savings.
Note that this can exceed the interest you receive from those savings.
Line 32: This can also include miscellaneous adjustments, including jury pay returned to your employer, expenses related to the rental of personal property, and some employee expenses.
I may withdraw this Epinion and split it into two parts, for the income and expenses sections separately.
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