Preparing To File Your 2006 Tax Return: Reporting Your Income

In one sense, the US Tax Code makes reporting your income easy. Under the US Tax Code, all income is taxable unless it is specifically exempt. But the Tax Code does list numerous exemptions to this general rule which makes determining what is taxable and non-taxable income very confusing indeed.

In this blog, and in several others to follow, I will be explaining exactly what income is taxable and also give example of what income is non-taxable. In addition, I will be explaining the various types of information returns taxpayers will be receiving over the next few weeks and how to report the information that is shown on these information forms. These forms include, of course, the W-2, but also various kinds of 1099s such as 1099-Int, 1099-Div, 1099-Misc, and 1099-R, to name a few of the most common ones.

In my last blog I explained some of the boxes on the W-2. In this blog I want to explain a little more about what kinds of taxable income is included in the Box 1.

Box 1, as I wrote in my last blog, is taxable wages and tips and what is reported in Box 1 must be reported on Line 7 of Forms 1040 and 1040A and Line 1 of Form 1040EZ. That is why it is important to make sure that the number in Box 1 of your W-2 is correct since this number goes directly onto Line 7 of your 1040 or 1040A.

Some taxpayers are sometimes surprised to see how how this number is because the figure in Box 1 can be greater than just the wages or salary earned. That’s because Box 1 can also include the following taxable amounts in addition to salary and wages:

Bonuses (including signing bonuses)

Taxable fringe benefits

Per diem or mileage allowances exceeding the IRS rate

Cost of group-term life insurance coverage over $50,000

The taxable amount of nonstatutory stock options excercised

Severance Pay

As for the last item, severance pay, severance pay received upon the loss of a job is taxable. However the rules for the taxation of severance pay vary among the states. So, the whole amount of severance pay received may not be taxable to your state of residence. For example, North Carolina exempts the first $35,000 of severance pay received.

To help make your tax filing easier, every day I’m posting tax filing tips on my website, www.mynetprofittools.com/taxtips.