Amounts you receive as severance pay are taxable. A lump sum payment for cancellation of your employment contract is income in the tax year you receive it and must be reported with your other salaries and wages. For additional information on wages, salaries, and other earnings, refer to Chapter 6 of Publication 17, Your Federal Income Tax, or Tax Topic 401, Wages and Salaries.

My Form W-2 includes allocated tips. What are they and how are they taxed?

Certain employers must allocate tips if the percentage of tips reported by employees falls below a required minimum percentage of gross sales. To allocate tips means to assign an additional amount as tips to each employee whose reported tips are below the required percentage. For additional information on how the rules for tip allocation work, refer to Chapter 7 of Publication 17, Your Federal Income Tax. All tips you receive are taxable. If you do not have adequate records for your actual tips, you must include the allocated tips shown on your Form W-2 as additional tip income on your return. For more information on the requirements, see Tip Allocation in Publication 531, Reporting Tip Income. Refer to Tax Topic 402, Tips, for other important information.

I am a sole proprietor. Can I use Schedule C-EZ instead of Schedule C?

You can use Schedule C-EZ to determine your net profit if you have only one sole proprietorship and you meet all of the following requirements:  your business expenses were not more than $2,500 and you did not have a net loss from your business, you use the cash method of accounting, and you did not have an inventory during the year. There are five other requirements. Refer to page 1 of Schedule C-EZ to see if you qualify. Additional information is also available in Tax Topic 408, Sole Proprietorship.

How much am I allowed to deduct as a capital loss this year?

Your allowable capital loss deduction for any tax year, figured on Schedule D, is limited to the lesser of:

• $3,000 ($1,500 if you are married and file a separate return) or
• Your capital loss as shown on line 18 of Schedule D.

If you have a capital loss on line 18 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to later years until it is completely used up. Refer to Publication 17, Your Federal Income Tax, or Tax Topic 409, Capital Gains and Losses, for additional information.