Friday, August 22, 2008

The U.S. Income Tax Topics 1

Copy of Tax Return and Transcripts
If you did not keep a copy of your tax return, you can get it from IRS. You can also get transcripts of the tax return. Transcripts serve most of your requirements. There is no fee for the transcripts. Transcripts have most of the information from your tax return including information from W2, 1099. Transcripts are normally available for 3-years. You can order a transcript by calling 1-800-829-1040, or using Form 4506-T, Request for Transcript of Tax Return. If you have a fax number, you can get it faxed.

To request for Copy of Tax Return you must use Form 4506. You will get copy of tax return filed by you along with all the attachments (like W2, 1099..). For each return the charges are $57 and IRS takes about 60 days to complete your request. In the Form 4506 you can also authorize a third party to receive the return.

Debt Cancellation
Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. If canceled is intended as a gift to you, then it is not income. A debt includes any indebtedness for which you are personally liable. However, in case of bankruptcy, insolvency or no-recourse loans, the debt cancellation is not treated as income. A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. The lender cannot pursue you personally in case of default.

If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21 (Other Income). If it is a business debt, report the amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F, Profit or Loss From Farming (Form 1040), if the debt is farm debt and you are a farmer).
Also read about debt cancellation in case of foreclosure or repossession.

Settlement - Taxability
Court awards and damages.

You must consider the items that the settlement replaces. Part of settlement may be taxable depending upon:
1. Physical injuries or physical sickness settlements are generally non-taxable if you did not take an itemized deduction for medical expenses related to this injury in prior years. If you did deduct medical expenses related to the injury, the amount is taxable and is reported as "Other Income" on line 21 of Form 1040.

2 Interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable. Interest is taxable as "Interest Income" and is reported on line 8a of Form 1040). Punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are reported as "Other Income" on line 21 of Form 1040.

Punitive Damages are taxable even if is related to a physical injury or physical sickness). Emotional distress or mental anguish amounts are taxable to the extent that they exceed medical costs, not previously deducted, for treatment of emotional distress or mental anguish.

3. Compensation for lost wages or lost profits in most cases is taxable income. Amounts received in settlement of pension rights (if you did not contribute to the plan) is taxable.

4. Loss-of-use or loss-in-value of property settlements may be taxable if the settlement exceeds your basis in the property; the excess is gain. Gains on personal capital assets are reported on Form 1040’s Schedule D, Capital Gains and Losses. Gains on business capital assets are reported on Form 4797, Sale of Business Property.

5. Attorneys fees are deductible if they are an attempt to get you taxable income otherwise they are not deductible. You can usually deduct legal expenses that you pay or incur to produce or collect taxable income or in connection with the determination, collection, or refund of any tax.

Scholarship and Fellowship Grants
If you are a degree candidate and if the financial aid (includes scholarship and fellowship grants) is for tuition fee, other fees, books, supplies and equipment, and are not a payment for your services, then it is not taxable. For a degree candidate aid for boarding and travel are taxable. If you are not a degree candidate, then all the financial aid is taxable. You must use Worksheet 1-1 in Chapter 1 of Publication 970 to figure out the taxable amount.

If you receive a scholarship award under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, the amount received is tax free without regard to any services you are obligated to perform.

Scholarship and fellowship grants not reported on Form W-2 are included in your wages income. Also, enter “SCH” and the amount on the dotted line next to line 7 of Form 1040 (or line 1 of 1040EZ or line 7 of 1040A). However, if you were a degree candidate, include on line 7 only the amounts you used for expenses other than tuition and course-related expenses. For example, amounts used for room, board, and travel must be reported on line 7.

Any "SCH" amount that you put on line 7 of Form 1040 is subject to employment taxes at 15.3%. Include amounts you receive under a scholarship as pay for your services as an independent contractor in determining your net earnings from self-employment. If your net earnings are $400 or more, you will have to pay self-employment tax. Use Schedule SE, Self-Employment Tax, to figure this tax.
Read IRS Publication 970 - Tax Benefits for Education - Tax Benefits for Education; Chapter 1--Scholarships, Fellowships, Grants, and Tuition Reductions.

Social Security Income & Disability Benefits
Your social security benefits including social security disability benefits (excluding SSI payments) may be taxable, if the total of one-half of your benefits, plus all your other income including tax-exempt interest is more than the base amount for your filing status. The SSI benefits are not taxable.

Your base amount (without any exclusions) is:
$25,000 if you are single, head of household, or qualifying widow(er),
$25,000 if you are married filing separately and lived apart from your spouse for all of 2007,
$32,000 if you are married filing jointly, or
$-0- if you are married filing separately and lived with your spouse at any time during 2007.

Generally, up to 50% of your benefits will be taxable. However, up to 85 percent of your benefits could be taxed if
* you are a single and the total of all your other income plus half of your Social Security checks exceed $34,000,
* you are married filing jointly and the total of all your other income plus half of your Social Security checks exceed $44,000, or
* you are married filing separately and lived with your spouse at any time during 2008.
To find out your taxable benefits, you must complete the work sheet found in your Form 1040 or 1040A instruction book.

Your social security benefits or rail road benefits are reported in box 5 of Form SSA-1099 or RRB-1099. Enter is amount on Form 1040 line 20a or on Form 1040A line 14a. The taxable part of the benefits will appear on Form 1040 line 20b or on Form 1040A line 14b.

More Articles:
Your Filing Status
1. Filing Status for Married
2. Head of Household
Exemptions for Dependents
1. Requirements for claiming a dependent
2. Child of separated or divorced parents
Filing Requirements
1. Filing Requirement for a Dependent
2. 2009 Filing Requirements
Your Income
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent Contractor
3. Filing W4 Employee’s Withholding Allowance Certificate
4. Missing W2, 1099-Misc, 1099-R, 1099-Int
Your Foreign Income
1. U.S. Citizen or Resident with Foreign Income
2. Foreign Bank and Financial Accounts
Income Exemptions and Deductions
1. Moving Expenses
2. Itemized deductions
3. Student Loan Interest Deductions
Income Adjustment
1. Traditional IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
U.S. Gift tax and Inheritance Tax
1. The U.S. Gift Tax
2. Tax on Inheritances
Sale of Your Home
1. Profit from the Sale of Your Home
2. Foreclosure or Repossession of Main Home
3. First-Time Homebuyer Credit
State Tax Return
1. Working in Two or More States
What's New for 2009
What's New for 2009

Complete List of Articles

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