INDIVIDUAL FEDERAL INCOME TAXES
WHAT IS INCLUDED IN GROSS INCOME
INVESTMENT INCOME
TAXABLE INTEREST INCOME
All taxable interest must be reported on your tax return. This will generally be
reported to you on a Form 1099-INT. You will receive taxable interest from bank
accounts, corporate bonds and US Treasury bonds. It will also include interest you
earned on money that you loan to another person.
TAX-FREE INTEREST INCOME
Generally, you pay no tax on interest on bonds of states, cities, counties, the
District of Columbia or a possession of the United States. It includes bonds or notes of
port authorities, toll road commissions, utility services activities, community
redevelopment agencies and similar bodies created for public purpose. Even if the taxexempt
interest is not taxable, it must be reported on your tax return because it can
affect other calculations on the return.
DIVIDENDS
Dividends paid to you out of a corporation’s earnings and profits are taxable as
ordinary income on your tax return. They will be reported to you on Form 1099-DIV.
Distributions from mutual funds are also reported on Form 1099-DIV. Mutual fund
distributions are taxable whether you receive them in cash or they have been reinvested
in additional shares.
Dividends from most domestic corporations are treated as “qualified dividends”
and are taxed at a lower tax rate than ordinary dividends.
CAPITAL GAINS OR LOSSES
When you sell a capital asset, such as stocks or bonds, at a profit, you will have
a capital gain that must be reported on your tax return. Capital asset sales must be
separated into short-term and long-term categories. Assets held one year or less are
short-term and if held more than one year are long-term. Long-term gains are taxed at
a lower tax rate.
If a capital asset is sold at a loss, this loss can be used to reduce capital gains. If
the losses are greater than the gains, $3,000 of the loss can be deducted against other
ordinary income. The excess can be carried forward to a future year and deducted.
You may also have taxable capital gains from distributions from mutual funds.
These would result from the sale of capital assets within the mutual fund and are
taxable to you whether you receive the cash or have it reinvested in additional shares.
RENTAL INCOME
If you own rental property such as residential or commercial properties and
receive rental income, you must report this income on your tax return. Any expenses
you have on these rental properties can be deducted against the rental income.