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ARE YOUR SOCIAL SECURITY BENEFITS TAXABLE?

How much, if any, of your social security benefits are taxable depends on your total income and marital status. Generally, if social security benefits were your only income, your benefits are not taxable and you probably do not need to file a federal income tax return

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status. Your taxable benefits and modified adjusted gross income are figured in a worksheet in the Form 1040A or Form 1040 Instruction booklet.

Before you go to the instruction book, do the following quick computation to determine whether some of your benefits may be taxable:

• First, add one–half of the total social security you received to all your other income, including any tax exempt interest and other exclusions from income 
• Then, compare this total to the base amount for your filing status.

The 2006 base amounts are:

• $32,000 for married couples filing jointly 
• $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year
• $0 for married persons filing separately who lived together during the year

For additional information on the taxability of social security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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WHAT INCOME IS TAXABLE? NONTAXABLE?

Generally, most income you receive is taxable. But there are some situations when certain types of income are partially taxed or not taxed at all. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income.

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer
• Tax Exempt Interest from municipal bonds and tax exempt bond mutual funds.  Although this interest is not taxable it must be reported on line 8b of Form 1040 or 1040A.

Examples of items that may or may not be included in your income are:

• Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov to view or download Publication 525 from the Forms and Publications section or call 800-TAX-FORM (800-829-3676).

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More Direct Deposit Options- Split Your Refund

Starting in 2007, taxpayers have more choices and flexibility for the direct deposit of 2006 federal income tax refunds. For the first time, taxpayers can split refunds among up to three accounts held by as many as three different U.S. financial institutions, such as banks, mutual funds, brokerage firms or credit unions.

The split-refund option is available to taxpayers who choose direct deposit regardless of whether they filed the original returns on paper or in electronic format using Form 1040, 1040A, 1040EZ, 1040-PR, 1040NR, 1040NR-EZ or 1040-SS. However, taxpayers filing Form 1040-EZ-T, Request for Refund of Federal Telephone Excise Tax, or Form 8379, Injured Spouse Allocation, cannot opt to split their refund.

To split direct-deposit refunds among two or three accounts or financial institutions, taxpayers should complete new Form 8888, Direct Deposit of Refund to More Than One Account. Taxpayers can continue, though, to use the direct deposit line on Form 1040 to electronically send their refunds to one account.

The IRS will electronically deposit refunds to taxpayers’ accounts held by a U.S. financial institution, providing that an accurate account number and American Bankers Association (ABA) routing number is supplied and the financial institution accepts direct deposits for the type of accounts designated. Taxpayers should verify routing and account numbers with their financial institutions. IRS assumes no responsibility for taxpayer or preparer error.

Note that taxpayers can do things much faster electronically than by paper. For those filing their taxes electronically, the refund is deposited in their account within two weeks. A paper check refund takes three weeks.  Those filing taxes on paper, the process is longer. They get their direct deposit refund within four to six weeks or paper checks within six weeks.  

By using the IRS’ popular Where’s My Refund? Feature, taxpayers can track their refunds. Taxpayers can access Where’s My Refund? online at IRS.gov or by calling 800-829-1954.      

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CAN YOU USE SCHEDULE C-EZ?

Your business may be eligible to use the abbreviated Schedule C-EZ instead of the longer Schedule C when reporting business profit and loss on your 2006 Form 1040 federal income tax return. The maximum deductible business expense threshold for filing Schedule C-EZ is $5,000.

Schedule C-EZ, Net Profit from Business (Sole Proprietorship), is the simplified version of Schedule C, Profit or Loss from Business (Sole Proprietorship).

Schedule C-EZ:

• Has an instruction page and a one-page form with three short parts — General Information, Figure Your Net Profit, and Information on Your Vehicle.
• Includes a simple worksheet for figuring the amount of deductible expenses. If that amount does not exceed $5,000, and if your business did not have a net loss, you should be able to use the C-EZ instead of Schedule C.

Schedule C:

• Is two pages long and is divided into five parts — Income, Expenses, Cost of Goods Sold, Information on Your Vehicle, and Other Expenses.
• Requires more detailed information than the C-EZ. The instruction package is nine pages long.
• Must be used when deductible business expenses exceed $5,000 and/or when a business has a net loss.      

Using Schedule C-EZ can save time and money and reduce paperwork burden for newly-eligible businesses.  More information about Schedule C-EZ and reporting net profit for sole proprietorships can be found on the IRS Web site at IRS.gov.

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