The (11) income categories from the forms 1040EZ and 1040A are carried forward and incorporated into the 1040 form. If you have not been able to read and study the (2) previous posts about these (11) income categories, please do that now so you are familiar with these Income types. Those blog posts are The 1040EZ: Who Can Use this Form? and The 1040A: (7) New Income categories. The (11) previous Income categories are:
- Wages, Salaries and Tips
- Taxable Scholarships or Grants
- Taxable Interest – that can be over $1,500 on the 1040A and 1040 forms
- Tax Exempt Interest
- Ordinary Dividends
- Qualified Dividends
- Capital Gain Distributions
- IRA Distributions
- Pension and Annuity Distributions
- Unemployment Compensation
- Social Security Benefits
The (8) new income categories added to the form 1040 are:
- line 10: Taxable refunds, credits, or offsets of state and local income taxes
- line 11: Alimony received
- line 12: Business income or (loss)
- line 13: Capital gain or (loss)
- line 14: Other gains or (losses)
- line 17: Rental real estate, royalties, partnerships, S-corps., trusts, etc.
- line 18: Farm income or (loss)
- line 21: Other income
This blog post will give an introduction to these (8) new income categories. Subsequent blog posts will explain some in more detail.
Taxable refunds, credits, or offsets of state and local income taxes affects taxpayers who use the Itemized Deduction feature and also deducted State or Local taxes as a Itemized Deduction on line 5a of their Schedule A form. See the image below of the Schedule A line 5a:
If you receive a State tax refund in the same tax year that you deducted State and Local taxes on your Federal Schedule A, line 5a, as an Itemized Deduction, you most often have to report that State refund as ordinary income the following year on line 10 of your 1040 form.
This is because you received a federal income tax benefit – lower line 43 Taxable Income – due to you being able to deduct your State and Local taxes on the Schedule A. The IRS considers you then received a double benefit with that State refund, so they require you to report it as income the following year on their IRS 1040 tax return.
The State will mail you the form 1099-G that shows your previous year refund amount on line 2 of the form, or they will make the 1099-G available for download from their website. See the form 1099-G.
Pages 23 & 24 of the 1040 Instructions have the line 10 explanation and worksheet State and Local Income Tax Refund Worksheet that calculates if any of your previous year State refund(s) are taxable the following year on your Federal 1040 form.
If you received any State-specific credits in your State refund – those are not to be included as potentially taxable in the line 10 calculation. For example in New York City, some people receive a Rent-based credit/refund. This would not be part of the taxable New York State refund calculated by the worksheet.
This line 10 requirement does not apply to you if you took advantage of the Standard Deduction the previous year and did not Itemize your Deductions. It also does not apply if you instead used the General Sales Taxes itemized deduction value on line 5b. Taxpayers in States without an income tax, like Florida, use the General Sales Tax line 5b deduction.
All tax software calculates this line 10 Taxable Refund for you, but you have to give the details of your previous year’s Federal and State tax returns – so the software can determine if all or part of the previous year’s State tax refund is taxable on your current year IRS 1040 form.
Alimony received is income you received from a former spouse, per the stipulations of your divorce or separation agreement settlement. It is sometimes also referred to as Separation Maintenance.
This is considered by the IRS as ordinary income and must be reported on line 11 of the form 1040. You must also provide the payer of this Alimony with your social security number, as that payer can take a line 31a Adjustment deduction for paying that Alimony. Your social security number is then listed on line 31b of their 1040 tax return.
The IRS cross-references both of your social security numbers, most importantly to make sure the recipient of the Alimony reported it as ordinary income on their 1040 tax form. If the IRS cannot verify this, they might disallow the line 31a Adjustment deduction for the payer of the Alimony.
Business income or (loss) is income you received from Self-Employment. The IRS defines this Business Income as “If you operated a business or practiced your profession as a sole proprietor.” This is reported on the Schedule C form which lists your gross income and all expenses. Your Net Profit or Loss then flows from the Schedule C to line 12 of the form 1040. The next several blog posts will explain Self-Employment income, the Schedule C, and other tax forms related to your own business income.
Capital gain or (loss) are the proceeds or losses recorded when you sell a Capital Asset, such as a stock or bond. Most often these transactions need to be reported on the form 8949 – Sales and Other Dispositions of Capital Assets and the Schedule D. Your net profit or loss from these investments is then listed on line 13 of the 1040. A separate blog post will explain these.
Other gains or (losses) are the proceeds or losses recorded when you sold or exchanged assets used in a trade or business. These asset sales are listed on the form 4797 – Sale of Business Property. Your net profit or loss from these business-related asset sales is then listed on line 14 of the 1040. A separate blog post will explain these.
Rental real estate, royalties, partnerships, S-corps., trusts, etc. are reported on the Schedule E with the income reported to the taxpayer on various forms, like the 1099-MISC and the K-1 forms. The total gain or loss from these investments is then listed on line 17 of the form 1040. A separate blog post will explain these categories of income.
Farm income or (loss) are the proceeds or losses from operating a farm. This is reported on the Schedule F form. The Net Profit or Loss from the Farm Operation then flows from the Schedule F to line 18 of the form 1040. A separate blog post will explain this, and also what constitutes a Farm Operation.
Other income listed on line 21 of the form 1040 is any other category of income, not described on lines 7 through 20a of the form 1040, such as:
- Prizes, Awards, Lottery and Gambling winnings
- Jury Duty pay
- Reimbursements of deductions you took in an earlier year, such as Medical Expenses, Real Estate Taxes, or Home Mortgage Interest.
- Rental of personal property – not in the business of renting such property
- For example, you rented your snow blower during last Winter’s blizzard
- Hobby income, not engaged in for profit
- A Net Operating Loss (negative value on line 21) from a Business, etc.
A separate blog post will explain these.
Click the hyperlink below to learn about Self-Employment and how that activity will generate a Business Income or Loss. You will begin learning about the Schedule C – the form used to report this sort of Business Income. The first step is to describe your business on the Schedule C.
The 1040 – The Schedule C: Describe Your Business
Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com
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Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.