Off to the Mine: Tax Credits and Deductions if You Have a Regular Job

We can't promise you'll be able to claim even a tiny share of them, but if you work a regular job here's a laundry list of tax credits and deductions you should know about.

| March/April 1985

  • regular job, tax credits and deductions - cartoon of pick-wielding workers entering mine
    Whether your regular job involves working in a mine or somewhere else, an assortment of tax credits and deductions may be available to reduce your tax bill.
    Illustration by Jack Vaughn

  • regular job, tax credits and deductions - cartoon of pick-wielding workers entering mine

One spoof of income tax is a form with three lines. The first says, "How much money did you make last year?" The second says, "How much did it cost to earn it?" The last says, "Send in the difference." This, of course, is inaccurate from the word go, because you already sent much of it in the form of withholding from your paycheck. But actually, the satirical form describes pretty accurately the process of filing taxes in you have a regular job. You need to know [1] how much you earned (gross income); [2] how much you spent getting there: your income adjustments and deductions (either itemized or according to Uncle Sam's standard deduction, whichever is greater); [3] the amount of tax imposed on the remainder when [2] is subtracted from [1]; and [4] the amount of any credits that can be taken from that tax.

Most of the time working for one employer doesn't give you a wide range of tax credits and deductions, but a review of the basic process involved in filing in this situation will give you the groundwork you need to move on to more involved tax situations later. If you choose to itemize your deductions by filing Schedule A, you'll be allowed to include a broad range of business-related expenses as deductions, in addition to non-business itemized deductions. Unless you own a home and are paying interest on a mortgage, however, you probably won't have enough expenses to justify itemizing. The standard deduction, now called the zero bracket amount, may prove to be more to your advantage. Thus you'll be filing the standard 1040 — perhaps with a couple of other explanatory forms.

How Much You Earned

For tax purposes, you have two lives: your personal and business ones. And when you work at a regular job for a wage or salary, from which your employer withholds income tax prepayments throughout the year, the majority of your income is likely to be from that job (your business life) as reflected in one form: the W-2. But receiving a W-2 certainly doesn't mean that employment is your sole source of income. Beyond the standard supplementary types of income, such as interest and dividends, some examples of other sorts of revenue, and the locations on Form 1040 where they must be reported, include the following:

  • Alimony (as opposed to child support) received must be reported on line 11 of Form 1040.
  • Barter income: The exchange of goods or services for other goods or services must be reported on line 22 of Form 1040 if they aren't related to your trade or business. If you are self-employed and barter for your wages, the fair market value of the income must be reported on Schedule C.
  • Canceled debts you owed must be reported as income on line 22, Form 1040. (If you don't believe it, just ask Geraldine Ferraro.)
  • Cooperative benefits: If you receive a discount on goods for services rendered at a cooperative, this is taxable income. If you receive dividends on your membership fee from a cooperative, this amount is taxable, and you should receive Form 1099-PATR in the mail from the cooperative.
  • Damages you are awarded for lost wages or profits, but not those that compensate for personal injury or sickness (unless those awards are punitive), must be reported on line 22, Form 1040.
  • Foreign income of U.S. citizens is fully taxable and must be reported on line 7, Form 1040.
  • Free tours, even those for which you serve as an organizer, must be reported as income on line 22, Form 1040. Expenses of voluntary leaders may not be deducted.
  • Gain from sale of your home: The amount you receive when you sell your home (minus expenses of sale), less the price you paid for your house added to the cost of improvements you've made (the total of which is called your basis), is taxable as a capital gain and must be reported on Schedule D. Thus, keeping good records of improvements you make to your house is quite important. An excess of improvements isn't helpful, though: If you sell your house for less than your basis, the loss isn't deductible (unless you turn your home into a rental house before selling it—see Publications 523 and 527 for rules).

Fortunately, even if you have a substantial gain, you can postpone taxes on that amount by reinvesting the basis and gain in a new principal residence. It's important to understand that you'll only be postponing the inevitable, however. The basis of your new home will be reduced by the amount of gain you reinvest (and defer taxes on), so that when you sell that home, the "new" taxable gain will include the amount you postponed earlier. You may not postpone the gain on any part of your home used for business during the year of sale. But you can choose to exclude up to $125,000 in gain from the sale of your principal residence if you are 55 or older, have used the home as your principal residence for three of the last five years, and have not excluded gain on a sale or exchange of a home after July 26, 1978.

  • Gambling winnings must be reported on line 22 of Form 1040. Losses may be deducted on Schedule A up to the extent of winnings.
  • Hobby income should be reported on line 22 of 1040. Expenses may be deducted, but only to the extent of income.
  • Refunds you have received on state or local taxes that were deducted in previous years should be reported on line 10, Form 1040.
  • In some cases, per diem expenses from your employer in excess of $44 per day must be reported as income on line 7, Form 1040. Attach an explanation.
  • Sales of personal items, as well as investment property, at a profit should be reported as capital gains on Schedule D. If the items are not considered investments, losses may not be deducted; items such as gold, coins, and gems are generally considered investments, and a sale at a value greater or less than the purchase price is treated as either a capital gain or loss.
  • Solar energy grants received from your state under the Solar Hot Water Initiative Program must be reported on line 22 (you may also qualify for a renewable energy tax credit, however).

Special Items for Which You Should Receive (and Must Submit) 1099 or W-2 Earnings Statements

  • Annuities or pensions: Payments received from an employer pension plan must be reported on line 16 or 17a and b, Form 1040. Distributions from Individual Retirement Accounts must be reported on line 17a of 1040, unless certain penalties apply. See Publication 590.
  • Awards: All prizes and awards—except certain ones that are made in recognition of achievement, that were not applied for, and that imply no future services-should be reported on line 22, Form 1040.
  • Group life insurance premiums paid by your employer on a policy that exceeds $50,000 are reported on line 7 of Form 1040.
  • Stock options: Some stock options must be reported on line 7, Form 1040. See IRS Publication 525.
  • All unemployment benefits must be reported on line 20a, and they may be taxable. Receiving such benefits may also force you to make estimated tax payments during the year. See IRS Publication 505.

Further elaboration on what is and isn't taxable income can be found in IRS Publications 17 and 525.

Deductions Available to All

The following items are some of the expenses that can be deducted from gross income whether or not you itemize deductions.


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