2001 Tax Help Archives  

Income

This is archived information that pertains only to the 2001 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Foreign-Source Income

You must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. You must also report earned income, such as wages and tips, from sources outside the United States.

If you worked abroad, you may be able to exclude part or all of your earned income. For details, see Pub. 54 and Form 2555 or 2555-EZ.

Community Property States

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you and your spouse lived in a community property state, you must usually follow state law to determine what is community income and what is separate income. For details, see Pub. 555.

Rounding Off to Whole Dollars

To round off cents to the nearest whole dollar on your forms and schedules, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. If you do round off, do so for all amounts. But if you have to add two or more amounts to figure the amount to enter on a line, include cents when adding and only round off the total.

Line 7 - Wages, Salaries, Tips, etc.

Enter the total of your wages, salaries, tips, etc. If a joint return, also include your spouse�s income. For most people, the amount to enter on this Line should be shown in box 1 of their Form(s) W-2. But the following types of income must also be included in the total on Line 7.

  • Wages received as a household employee for which you did not receive a W-2 form because your employer paid you less than $1,300 in 2001. Also, enter �HSH� and the amount not reported on a W-2 form on the dotted line next to Line 7.
  • Tip income you did not report to your employer. Also include allocated tips shown on your W-2 form(s) unless you can prove that you received less. Allocated tips should be shown in box 8 of your W-2 form(s). They are not included as income in box 1. See Pub. 531 for more details.

You may owe social security and Medicare tax on unreported or allocated tips. See the instructions for Line 54 on page 39.

  • Dependent care benefits, which should be shown in box 10 of your W-2 form(s). But first complete Form 2441 to see if you may exclude part or all of the benefits.
  • Employer-provided adoption benefits, which should be shown in box 12 of your W-2 form(s) with code T. But first complete Form 8839 to see if you may exclude part or all of the benefits.
  • Scholarship and fellowship grants not reported on a W-2 form. Also, enter �SCH� and the amount on the dotted line next to Line 7. Exception. 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.
  • Excess salary deferrals. The amount deferred should be shown in box 13 of your W-2 form and the "Retirement Plan" box in box 13 should be checked. If the total amount you (or your spouse if filing jointly) deferred for 2001 under all plans was more than $10,500, include the excess on Line 7. But a different limit may apply if amounts were deferred under a tax-sheltered annuity plan or an eligible plan of a state or local government or tax-exempt organization. See Pub. 525 for details.

You may not deduct the amount deferred. It is not included as income in box 1 of your W-2 form.

  • Disability pensions shown on Form 1099-R if you have not reached the minimum retirement age set by your employer. Disability pensions received after you reach that age and other pensions shown on Form 1099-R (other than payments from an IRA* or Coverdell education savings account (ESA) are reported on Lines 16a and 16b. Payments from an IRA are reported on Lines 15a and 15b.
  • Corrective distributions shown on Form 1099-R of (a) excess salary deferrals plus earnings and (b) excess contributions plus earnings to a retirement plan. But do not include distributions from an IRA* or Coverdell ESA on Line 7. Instead, report them on Lines 15a and 15b.

* This includes a Roth, SEP or Simple IRA

Were You a Statutory Employee?

If you were, the �Statutory employee� box in box 13 of your W-2 form should be checked. Statutory employees include full-time life insurance salespeople, certain agent or commission drivers and traveling sales-people, and certain homeworkers. If you have related business expenses to deduct, report the amount shown in box 1 of your W-2 form on Schedule C or C-EZ along with your expenses.

Missing or Incorrect Form W-2?

If you do not get a W-2 form from your employer by January 31, 2002, use Tele-Tax Topic 154 to find out what to do. Even if you do not get a Form W-2, you must still report your earnings on Line 7. If you lose your Form W-2 or it is incorrect, ask your employer for a new one.

Line 8a - Taxable Interest

Each payer should send you a Form 1099-INT or Form 1099-OID. Report all of your taxable interest income on Line 8a. But you must fill in and attach Schedule B if the total is over $400 or any of the other conditions listed at the beginning of the Schedule B instructions apply to you.

Interest credited in 2001 on deposits that you could not withdraw because of the bankruptcy or insolvency of the financial institution may not have to be included in your 2001 income. For details, see Pub. 550.


If you get a 2001 Form 1099-INT for U.S. savings bond interest that includes amounts you reported before 2001, see Pub. 550.

Line 8b - Tax-Exempt Interest

If you received any tax-exempt interest, such as from municipal bonds, report it on Line 8b. Include any exempt-interest dividends from a mutual fund or other regulated investment company. Do not include interest earned on your IRA or or Coverdell education savings account .

Line 9 - Ordinary Dividends

Each payer should send you a Form 1099-DIV. Report your total ordinary dividends on Line 9. But you must fill in and attach Schedule B if the total is over $400 or you received, as a nominee, ordinary dividends that actually belong to someone else.

Capital Gain Distributions

If you received any capital gain distributions, see the instructions for Line 13 on page 23.

Nontaxable distributions

Some distributions are nontaxable because they are a return of your cost (or other basis). They will not be taxed until you recover your cost (or other basis). You must reduce your cost (or other basis) by these distributions. After you get back all of your cost (or other basis), you must report these distributions as capital gains on Schedule D. For details, see Pub. 550.

Dividends on insurance policies are a partial return of the premiums you paid. Do not report them as dividends. Include them in income only if they exceed the total of all net premiums you paid for the contract.

Line 10 - Taxable Refunds, Credits, or Offsets of State & Local Income Taxes

None of your refund is taxable if, in the year you paid the tax, you did not itemize deductions.

If you received a refund, credit, or offset of state or local income taxes in 2001, you may receive a Form 1099-G. If you chose to apply part or all of the refund to your 2001 estimated state or local income tax, the amount applied is treated as received in 2001. If the refund was for a tax you paid in 2000 and you itemized deductions for 2000, use the worksheet below to see if any of your refund is taxable.

Exceptions. See Recoveries in Pub. 525 instead of using the worksheet if any of the following apply.

  • You received a refund in 2001 that is for a tax year other than 2000.
  • You received a refund other than an income tax refund, such as a real property tax refund, in 2001 of an amount deducted or credit claimed in an earlier year.
  • Your 2000 taxable income was less than zero.
  • You made your last payment of 2000 estimated state or local income tax in 2001.
  • You owed alternative minimum tax in 2000.
  • You could not deduct the full amount of credits you were entitled to in 2000 because the total credits exceeded the tax shown on your 2000 Form 1040, line 42 minus any foreign tax credit shown on the line 43 of that form.
  • You could be claimed as a dependent by someone else in 2000.

Also, see Tax Benefit Rule in Pub. 525 instead of using the worksheet if all three of the following apply.

  1. You had to use the Itemized Deductions Worksheet in the 2000 Schedule A instructions because your 2000 adjusted gross income was over: $128,950 if single, married filing jointly, head of household, or qualifying widow(er); $64,475 if married filing separately.
  2. You could not deduct all of the amount on Line 1 of the 2000 Itemized Deductions Worksheet.
  3. The amount on Line 8 of that 2000 worksheet would be more than the amount on Line 4 of that worksheet if the amount on Line 4 were reduced by 80% of the refund you received in 2001.

Line 11 - Alimony Received

Enter amounts received as alimony or separate maintenance. You must let the person who made the payments know your social security number. If you do not, you may have to pay a $50 penalty. For more details, use Tele-Tax Topic 406 or see Pub. 504.

Line 12 - Business Income or (Loss)

If you operated a business or practiced your profession as a sole proprietor, report your income and expenses on Schedule C or C-EZ.

Line 13 - Capital Gain or (Loss)

If you had a capital gain or loss, including any capital gain distributions from a mutual fund, you must complete and attach Schedule D.

Exception. You do not have to file Schedule D if all three of the following apply.

  1. The only amounts you have to report on Schedule D are capital gain distributions from box 2a of Forms 1099-DIV or substitute statements.
  2. None of the Forms 1099-DIV or substitute statements have an amount in box 2b (28% rate gain), box 2d (unrecaptured section 1250 gain), or box 2e (section 1202 gain).
  3. If you are filing Form 4952 (relating to investment interest expense deduction), or the amount on Line 4e of that form is zero or blank.

If all three of the above apply, enter your capital gain distributions on Line 13 and check the box on that Line. Also, be sure you use the Capital Gain Tax Worksheet on page 34 to figure your tax.

Line 14 - Other Gains or (Losses)

If you sold or exchanged assets used in a trade or business, see the Instructions for Form 4797.

Lines 15a and 15b - IRA Distributions

Note. If you converted part or all of an individual retirement arrangement IRA to a Roth IRA in 1998 and you chose to report the taxable amount over 4 years, see 1998 Roth IRA Conversions on this page.

You should receive a Form 1099-R showing the amount of the distribution from your (IRA) or Coverdell education savings account (ESA). Unless otherwise noted in the Line 15a and 15b instructions, an IRA includes a traditional IRA, Roth IRA, simplified employee pension (SEP) IRA, and a savings incentive match plan for employees (SIMPLE) IRA. Exept as provided below, leave Line 15a blank and enter the total distribution on Line 15b.

Exception 1. Enter the total distribution on line 15a if you rolled over part or all of the distribution from one:

  • IRA to another IRA of the same type (for example, from one traditional IRA to another traditional IRA),
  • Coverdell ESA to another, or
  • SEP or SIMPLE IRA to a traditional IRA.

Also, put �Rollover� next to line 15b. If the total distribution was rolled over, enter zero on line 15b. If the total was not rolled over, enter the part not rolled over on line 15b unless Exception 2 applies to the part not rolled over.

If you rolled over the distribution (a) in 2002 or (b) from a conduit IRA into a qualified plan, attach a statement explaining what you did.

Exception 2. If any of the following apply, enter the total distribution on line 15a and use Form 8606 and its instructions to figure the amount to enter on line 15b.

  • You received a distribution from an IRA (other than a Roth IRA) and you made nondeductible contributions to any of your traditional or SEP IRAs for 2001 or an earlier year. If you made nondeductible contributions to these IRAs for 2001, also see Pub. 590.
  • You received a distribution from a Roth IRA or Coverdell ESA.
  • You converted part or all of a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2001.
  • You had a 2000 or 2001 IRA or Cov-erdell ESA contribution returned to you, with the related earnings or less any loss, by the due date (including extensions) of your tax return for that year.
  • You made excess contributions to your IRA for an earlier year and had them returned to you in 2001.
  • You recharacterized part or all of a contribution to a Roth IRA as a traditional IRA contribution, or vice versa.

Note. If you received more than one distribution, figure the taxable amount of each distribution and enter the total of the taxable amounts on line 15b. Enter the total amount of those distributions on line 15a.

You may have to pay an additional tax if (a) you received an early distribution from your IRA and the total distribution was not rolled over, or (b) you were born before July 1, 1930, and received less than the minimum required distribution from your traditional , SEP,and SIMPLE IRAs. See the instructions for Line 55 on page 39 for details.

1998 Roth IRA Conversions. If you converted an IRA to a Roth IRA in 1998 and you chose to report the taxable amount over 4 years, leave Line 15a blank and enter on Line 15b the amount from your 1998 Form 8606, Line 17. But see the 2001 Instructions for Form 8606 for the amount to enter on the line 15 if (a) you rounded the amount on line 17 of your 1998 Form 8606 to the next higher whole dollar or (b) you received a distribution from a Roth IRA in 1998, 1999,or 2000.

Lines 16a and 16b - Pensions and Annuities

You should receive a Form 1099-R showing the amount of your pension and annuity payments. See page 25 for details on roll-overs and lump-sum distributions. Do not include the following payments on Lines 16a and 16b. Instead, report them on Line 7.

  • Disability pensions received before you reach the minimum retirement age set by your employer.
  • Corrective distributions of excess salary deferrals or excess contributions to retirement plans.

Attach Form(s) 1099-R to Form 1040 if any Federal income tax was withheld.

Fully Taxable Pensions and Annuities

If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line16a. Your payments are fully taxable if either of the following applies:

  • You did not contribute to the cost (see below) of your pension or annuity, or
  • You got your entire cost back tax free before 2001.

Fully taxable pensions and annuities also include military retirement pay shown on Form 1099-R. For details on military disability pensions, see Pub. 525. If you received a Form RRB-1099-R, see Pub. 575 to find out how to report your benefits.

Partially Taxable Pensions and Annuities

Enter the total pension or annuity payments you received in 2001 on line 16a. If your Form 1099-R does not show the taxable amount , you must use the General Rule explained in PUB 939 to figure the taxable part to enter on line 16b. But if your annuity starting date (defined on page 25) was after July 1, 1986, see page 25 to find out if you must use the Simplified Method to figure the taxable part.

You can ask the IRS to figure the taxable part for you for an $85 fee. For details, see Pub. 939.

If your Form 1099-R shows a taxable amount, you may report that amount on line16b. But you may be able to report a lower taxable amount by using the General Rule or the Simplified Method.

Annuity Starting Date

Your annuity starting date is the later of the first day of the first period for which you received a payment, or the date the plan�s obligations became fixed.

Simplified Method

You must use the Simplified Method if (a) your annuity starting date (defined above) was after July 1, 1986 , and you used this method last year to figure the taxable part or (b) your annuity starting date was after November 18,1996, and all three of the following apply.

  1. The payments are for (a) your life or (b) your life and that of your beneficiary.
  2. The payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity.
  3. At the time the pension or annuity payments began, either you were under age 75 or the number of years of guaranteed payments was fewer than 5. See Pub. 575 for the definition of guaranteed payments.

If you must use the Simplified Methods , complete the worksheet on page 24 to figure the taxable part of your pension or annuity. For more details on the Simplified Method see Pub. 575 or Pub. 721 for U.S. Civil Service retirement.


If you received U.S. Civil Service retirement benefits and you chose the lump-sum credit option, use the worksheet in Pub. 721. Do not use the worksheet on page 24.

Age (or Combined Ages) at Annuity Starting Date

If you are the retiree, use your age on the annuity starting date. If you are the survivor of a retiree, use the retiree�s age on his or her annuity starting date. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, use your combined ages on the annuity starting date.

If you are the beneficiary of an employee who died, see Pub. 575. If there is more than one beneficiary, see Pub. 575 or Pub. 721 to figure each beneficiary�s taxable amount.

Cost

Your cost is generally your net investment in the plan as of the annuity starting date. It does not include pre tax contributions. Your net investment should be shown in box 9b of Form 1099-R for the first year you received payments from the plan.

Rollovers

A rollover is a tax-free distribution of cash or other assets from one retirement plan that is contributed to another plan. Use Lines 16a and 16b to report a rollover, including a direct rollover, from one qualified employer�s plan to another or to an IRA or SEP.

Enter on Line 16a the total distribution before income tax or other deductions were withheld. This amount should be shown in box 1 of Form 1099-R. From the total on Line 16a, subtract any contributions (usually shown in box 5) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Line 16b. Also, put �Rollover� next to Line 16b.

Special rules apply to partial rollovers of property. For more details on rollovers, including distributions under qualified domestic relations orders, see Pub. 575.

Lump-Sum Distributions

If you received a lump-sum distribution from a profit-sharing or retirement plan, your Form 1099-R should have the �Total distribution� box in box 2b checked. You may owe an additional tax if you received an early distribution from a qualified retirement plan and the total amount was not rolled over. For details, see the instructions for Line 55 that begin on page 39.

Enter the total distribution on Line 16a and the taxable part on Line 16b.

You may be able to pay less tax on the distribution if you were born before 1936, you meet certain other conditions, and you choose to use Form 4972 to figure the tax on any part of the distribution. You may also be able to use Form 4972 if you are the beneficiary of a deceased employee who was born before 1936. For details, see Form 4972.

Line 19 - Unemployment Compensation

You should receive a Form 1099-G showing the total unemployment compensation paid to you in 2001.

If you received an overpayment of unemployment compensation in 2001 and you repaid any of it in 2001, subtract the amount you repaid from the total amount you received. Enter the result on Line 19. Also, enter �Repaid� and the amount you repaid on the dotted line next to Line 19. If, in 2001, you repaid unemployment compensation that you included in gross income in an earlier year, you may deduct the amount repaid on Schedule A, Line 22. But if you repaid more than $3,000, see Repayments in Pub. 525 for details on how to report the repayment.

Lines 20a and 20b - Social Security Benefits

You should receive a Form SSA-1099 showing in box 3 the total social security benefits paid to you. Box 4 will show the amount of any benefits you repaid in 2001. If you received railroad retirement benefits treated as social security, you should receive a Form RRB-1099.

Use the worksheet on page 26 to see if any of your benefits are taxable.

Exception. Do not use the worksheet on page 26 if any of the following apply.

  • You made contributions to a traditional IRA for 2001 and you were covered by a retirement plan at work or through self-employment. Instead, use the worksheets in Pub. 590 to see if any of your social security benefits are taxable and to figure your IRA deduction.
  • You repaid any benefits in 2001 and your total repayments (box 4) were more than your total benefits for 2001 (box 3). None of your benefits are taxable for 2001. In addition, you may be able to take an itemized deduction for part of the excess repayments if they were for benefits you included in gross income in an earlier year. For more details, see Pub. 915.
  • You file Form 2555, 2555-EZ, 4563, or 8815, or you exclude employer-provided adoption benefits or income from sources within Puerto Rico. Instead, use the worksheet in Pub. 915.

Line 21 - Other Income

Do not report on this Line any income from self-employment or fees received as a notary public. Instead, you must use Schedule C, C-EZ, or F, even if you do not have any business expenses. Also, do not report on line 21 any nonemployee compensation shown on Form 1099-MISC. Instead, see the chart on page 18 to find out where to report that income.

Use Line 21 to report any other income not reported on your return or other schedules. See examples that begin on page 26. List the type and amount of income. If necessary, show the required information on an attached statement. For more details, see Miscellaneous Taxable Income in Pub. 525.

Do not report any nontaxable income on Line 21, such as an advance payment of your 2001 taxes; child support; money or property that was inherited, willed to you, or received as a gift; or life insurance proceeds received because of a person�s death.

Examples of income to report on Line 21 are:

  • Prizes and awards.
  • Gambling winnings, including lotteries, raffles, a lump-sum payment from the sale of a right to receive future lottery payments, etc. For details on gambling losses, see the instructions for Schedule A, Line 27, on page A-6.
  • Jury duty fees. Also, see the instructions for Line 32 on page 30.
  • Alaska Permanent Fund dividends.
  • Qualified state tuition program earnings.
  • Reimbursements or other amounts received for items deducted in an earlier year, such as medical expenses, real estate taxes, or home mortgage interest. See Recoveries in Pub. 525 for details on how to figure the amount to report.
  • Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property. Also, see the instructions for Line 32 on page 30.
  • Income from an activity not engaged in for profit. See Pub. 535.
  • Loss on certain corrective distributions of excess deferrals. See Pub. 525.

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