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.

Foreign Retirement Plans. If you were a beneficiary of a foreign retirement plan, you may have to report the undistributed income earned in your plan. However, if you were the beneficiary of a Canadian registered retirement plan, see Form 8891 to find out if you can elect to defer tax on the undistributed income.

Report distributions from foreign pension plans on lines 16a and 16b.

Community Property States

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wiscsin. 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

You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.

If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding the amounts and round off only 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 Form(s) W-2, box 1. 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 Form W-2 because your employer paid you less than $1,400 in 2004. Also, enter "HSH" and the amount not reported on Form W-2 on the dotted line next to line 7.
• Tip income you did not report to your employer. Also include allocated tips shown on your Form(s) W-2 unless you can prove that you received less. Allocated tips should be shown in Form(s) W-2, box 8. 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 58 on page 39.

• Dependent care benefits, which should be shown in Form(s) W-2, box 10. 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 Form(s) W-2, box 12, with code T. But see the Instructions for Form 8839 to find out if you can exclude part or all of the benefits. You may also be able to exclude amounts if you adopted a child with special needs and the adoption became final in 2004.
• Scholarship and fellowship grants not reported on Form W-2. Also, enter "SCH" and the amount on the dotted line next to line 7. However, 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 Form W-2, box 12, and the "Retirement plan" box in box 13 should be checked. If the total amount you (or your spouse if filing jointly) deferred for 2004 under all plans was more than $13,000 (excluding catch-up contributions as explained below), include the excess on line 7. This limit is increased to $16,000 for section 403(b) plans if you qualify for the 15-year rule in Pub. 571.

A higher limit may apply to participants in section 457(b) deferred compensation plans for the 3 years before retirement age. Contact your plan administrator for more information.

If you were age 50 or older at the end of 2004, your employer may have allowed an additional deferral (catch-up contributions) of up to $3,000 ($1,500 for SIMPLE plans). This additional deferral amount is not subject to the overall limit on elective deferrals.

You cannot deduct the amount deferred. It is not included as income in Form W-2, box 1.

• 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 payments shown on Form 1099-R (other than payments from an IRA*) are reported on lines 16a and 16b. Payments from an IRA are reported on lines 15a and 15b.
• Corrective distributions from a retirement plan shown on Form 1099-R of excess salary deferrals, and excess contributions (plus earnings). But do not include distributions from an IRA* on line 7. Instead, report distributions from an IRA 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 Form W-2, box 13, should be checked. Statutory employees include full-time life insurance salespeople, certain agent or commission drivers and traveling salespeexclude ople, and certain homeworkers. If you have related business expenses to deduct, report the amount shown in Form W-2, box 1, on Schedule C or Schedule C-EZ along with your expenses.

Missing or Incorrect Form W-2?

Your employer is required to provide or send Form W-2 to you no later than January 31, 2005. If you do not receive it by early February, use TeleTax topic 154 (see page 8) 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. Enter your total taxable interest income on line 8a. But you must fill in and attach Schedule B if the total is over $1,500 or any of the other conditions listed at the beginning of the Schedule B instructions (see page B-1) apply to you.

Interest credited in 2004 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 2004 income. For details, see Pub. 550.

If you get a 2004 Form 1099-INT for U.S. savings bond interest that includes amounts you reported before 2004, 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 Coverdell education savings account.

Line 9 - Ordinary Dividends

Each payer should send you a Form 1099-DIV. Enter your total ordinary dividends on line 9a. This amount should be shown in Form(s) 1099-DIV, box 1a. But you must fill in and attach Schedule B if the total is over $1,500 or you received, as a nominee, ordinary dividends that actually belong to someone else.

Nontaxable Distributions. Some distributions 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 9b - Qualified Dividends

Enter your total qualified dividends on line 9b. Qualified dividends are eligible for a lower tax rate than other ordinary income. Generally, these dividends are shown in Form(s) 1099-DIV, box 1b. See Pub. 550 for the definition of qualified dividends if you received dividends not reported on Form 1099-DIV.

Exception. Some dividends may be reported as qualified dividends in box 1b of Form 1099-DIV but are not qualified dividends. These include:

• Dividends you received as a nominee. See the Instructions for Schedule B.
• Dividends you received on any share of stock that you held for less than 61 days during the 121-day period that began 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock but not the day you acquired it. See the examples below. Also, when counting the number of days you held the stock, you cannot count certain days during which your risk of loss was diminished. See Pub. 550 for more details.
• Dividends attributable to periods totaling more than 366 days that you received on any share of preferred stock held for less than 91 days during the 181-day period that began 90 days before the ex-dividend date. When counting the number of days you held the stock, you cannot count certain days during which your risk of loss was diminished. See Pub. 550 for more details. Preferred dividends attributable to periods totaling less than 367 days are subject to the 61-day holding period rule above.
• Dividends on any share of stock to the extent that you are under an obligation (including a short sale) to make related payments with respect to positions in substantially similar or related property.
• Payments in lieu of dividends, but only if you know or have reason to know that the payments are not qualified dividends.

Example 1. You bought 5,000 shares of XYZ Corp. common stock on July 1, 2004. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 9, 2004. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on Authem gust 4, 2004. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 2, 2004, through August 4, 2004). The 121-day period began on May 10, 2004 (60 days before the ex-dividend date), and ended on September 7, 2004. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.

Example 2. Assume the same facts as in Example 1 except that you bought the stock on July 8, 2004 (the day before the ex-dividend date), and you sold the stock on September 9, 2004. You held the stock for 63 days (from July 9, 2004, through September 9, 2004). The $500 of qualified dividends shown in Form 1099-DIV, box 1b, are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 9, 2004, through September 7, 2004).

Example 3. You bought 10,000 shares of ABC Mutual Fund common stock on July 1, 2004. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 9, 2004. The ABC mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share.

Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 4, 2004. You have no qualified div-idends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.

Be sure you use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, whichever applies, to figure your tax. Your tax may be less if you use the worksheet that applies. See the instructions for line 43 that begin on page 33 for details.

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 2004, you may receive a Form 1099-G. If you chose to apply part or all of the refund to your 2004 estimated state or local income tax, the amount applied is treated as received in 2004. If the refund was for a tax you paid in 2003 and you itemized deductions for 2003, use the worksheet on page 21 to see if any of your refund is taxable.

Exception. See Recoveries in Pub. 525 instead of using the worksheet on page 21 if any of the following apply.

• You received a refund in 2004 that is for a tax year other than 2003.
• You received a refund other than an income tax refund, such as a real property tax refund, in 2004 of an amount deducted or credit claimed in an earlier year.
• Your 2003 taxable income was less than zero.
• You made your last payment of 2003 estimated state or local income tax in 2004.
• You owed alternative minimum tax in 2003.
• You could not deduct the full amount of credits you were entitled to in 2003 because the total credits exceeded the amount shown on your 2003 Form 1040, line 43.
• You could be claimed as a dependent by someone else in 2003.

Also, see Tax benefit rule in Pub. 525 instead of using the worksheet on page 21 if all of the following apply.

• You had to use the Itemized Deductions Worksheet in the 2003 Schedule A instructions because your 2003 adjusted gross income was over $139,500 ($69,750 if married filing separately).
• You could not deduct all of the amount on the 2003 Itemized Deductions Worksheet, line 1.
• The amount on line 8 of that 2003 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 2004.

State and Local Income Tax Refund Worksheet--Line 10

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 TeleTax Topic 406 (see page 8) 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 or a capital loss carryover from 2003, you must complete and attach Schedule D.

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

• The only amounts you have to report on Schedule D are capital gain distributions from Form(s) 1099-DIV, box 2a, or substitute statements.
• None of the Form(s) 1099-DIV or substitute statements have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain).

If both of the above apply, enter your total capital gain distributions (from box 2a of Form(s) 1099-DIV on line 13 and check the box on that line. If you received capital gain distributions as a nominee (that is, they were paid to you but actually belong to someone else), report on line 13 only the amount that belongs to you. Attach a statement showing the full amount you received and the amount you received as a nominee. See the Instructions for Schedule B for filing requirements for Form(s) 1099-DIV and Form 1096.

If you do not have to file Schedule D, be sure you use the Qualified Dividends and Capital Gain Tax Worksheet on page 34 to figure your tax. Your tax may be less if you use this worksheet.

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

You should receive a Form 1099-R showing the amount of any distribution from your individual retirement arrangement (IRA). 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. Except 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), or
• SEP or SIMPLE IRA to a traditional IRA.

Also, put “Rollover’ next to line 15b. If the total distribution was rolled over in a qualified rollover, enter -0- on line 15b. If the total distribution was not rolled over in a qualified rollover, enter the part not rolled over on line 15b unless Exception 2 applies to the part not rolled over. Generally, a qualified rollover must be made within 60 days after the day you received the distribtion. For more details on rollovers, see Pub. 590.

If you rolled over the distribution (a) in 2005, or (b) from an IRA into a qualified plan (other than an IRA), attach a statement explaining what you did.

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

1. 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 2004 or an earlier year. If you made nondeductible contributions to these IRAs for 2004, also see Pub. 590.
2. You received a distribution from a Roth IRA. But if either (a) or (b) below applies, enter -0- on line 15b; you do not have to see Form 8606 or its instructions.
1. Distribution code T is shown in Form 1099-R, box 7, and you made a contribution (including a conversion) to a Roth IRA for 1998 or 1999.
2. Distribution code Q is shown in Form 1099-R, box 7.
3. You converted part or all of a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2004.
4. You had a 2003 or 2004 IRA 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.
5. You made excess contributions to your IRA for an earlier year and had them returned to you in 2004.
6. You recharacterized part or all of a contribution to a Roth IRA as a traditional IRA contribution, or vice versa.

Note. If you (or your spouse if filing jointly) 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 addiline tional tax if (a) you received an early distribution from your IRA and the total was not rolled over, or (b) you were born before July 1, 1933, and received less than the minimum required distribution from your traditional, SEP, and SIMPLE IRAs. See the instructions for line 59 on page 39 for details.

Lines 16a and 16b - Pensions and Annuities

You should receive a Form 1099-R showing the amount of your pension and annuity payments. See pages 23 and 24 for details on rollovers 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 line 16a. Your payments are fully taxapplies, able if (a) you did not contribute to the cost (see page 23) of your pension or annuity, or (b) you got your entire cost back tax free before 2004.

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 2004 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 below) was after July 1, 1986, see Simplified Method below to find out if you must use that method to figure the taxable part.

You can ask the IRS to figure the taxable part for you for a $95 fee. For details, see Pub. 939.

If your Form 1099-R shows a taxable amount, you may report that amount on line 16b. 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 either of the following applies.

1. Your annuity starting date (defined above) was after July 1, 1986, and you used this method last year to figure the taxable part.
2. Your annuity starting date was after November 18, 1996, and both of the following apply.
1. The payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity.
2. On your annuity starting date, 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 Method, complete the worksheet on page 23 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 benefits.

If you received U.S. Civil Service retirement benefits and you chose the alternative annuity option, see Pub 721 to figure the taxable part of your annuity. Do not use the worksheet on page 23.

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 Form 1099-R, box 9b, for the first year you received payments from the plan.

Rollovers

Generally, a qualified rollover is a tax-free distribution of cash or other assets from one retirement plan that is contributed to another plan within 60 days of receiving the distribution. Use lines 16a and 16b to report a qualified 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 Form 1099-R, box 1. 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 of the qualified rollover. Enter the remaining amount, even if zero, on line 16b. Also, enter "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 in a qualified rollover. For details, see the instructions for line 59 on page 39.

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

Simplified Method Worksheet--Lines 16a & 16b

You may be able to pay less tax on the distribution if you were born before January 2, 1936, or you are the beneficiary of a deceased employee who was born before January 2, 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 2004.

If you received an overpayment of unemployment compensation in 2004 and you repaid any of it in 2004, 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 2004, 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 2004. If you received railroad retirement benefits treated as social security, you should receive a Form RRB-1099.

Use the worksheet on page 25 to see if any of your benefits are taxable.

Exception. Do not use the worksheet on page 25 if any of the following apply.

• You made contributions to a traditional IRA for 2004 and you or your spouse 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 2004 and your total repayments (box 4) were more than your total benefits for 2004 (box 3). None of your benefits are taxable for 2004. Also, you may be able to take an itemized deduction or a credit 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 comtions pensation shown on Form 1099-MISC. Instead, see the chart on page 15 to find out where to report that income.

Use line 21 to report any income not reported elsewhere on your return or other schedules. See the examples below. 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 amounts on line 21, such as 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:

• Taxable distributions from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). Distributions from these accounts may be taxable if (a) they are more than the qualified higher education expenses of the designated beneficiary in 2004, and (b) they were not included in a qualified rollover. See Pub 970

You may have to pay an additional tax if you received a taxable distribution from a Coverdell ESA or a QTP. See the Instructions for Form 5329.

• Taxable distributions from a health savings account (HSA) or an Archer MSA. Distributions from these accounts may be taxable if (a) they are more than the unreimbursed qualified medical expenses of the account beneficiary or account holder in 2004, and (b) they were not included in a qualified rollover. See Pub. 969.

You may have to pay an additional tax if you received a taxable distribution from an HSA or an Archer MSA. See the Instructions for Form 8889 for HSAs or the Instructions for Form 5329 for Archer MSAs.

• 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.

Attach Form(s) W-2G to Form 1040 if any federal income tax was withheld.

• Jury duty fees. Also, see the instructions for Line 35 on page 31.
• Alaska Permanent Fund dividends.
• 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 35 on page 31.
• Income from an activity not engaged in for profit. See Pub 525.
• Loss on certain corrective distributions of excess deferrals. See Retirement Plan Contributions in Pub 525.

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