You may have made more last year than you realize, at least that’s how the IRS views it.
This time of year, you’ll find blog post after blog post, news article after news article, pundit after pundit writing and talking about “little known tax deductions.” Those don’t scare me. What scares me are “little known” or worse – forgotten – sources of income that are subject to taxes. The IRS has a much better chance of finding income you failed to report than in discovering that you actually donated 7 garbage bags of used clothing rather than 9 bags of used clothing to the Salvation Army. So where do you think the IRS’s focus will be?
Where could I have earned extra money?
- Cash businesses
- Jury Duty
- Bonuses and Perks
- Unemployment Income
- Life Insurance
As always, check with your own tax professional to insure you pay the proper amount of taxes, but watch out for these extra sources of income:
If you’ve employed ways to make extra money, and you’ve been successful at it – GREAT! Just make sure you accurately report all cash income to the IRS. As tempting as it may be to under-report cash generated from a business, it isn’t worth the risk. The penalties, interest, and future scrutiny will drive you crazy.
Don’t think that if you avoid using a checking account and deal only in cash that the IRS won’t figure it out eventually.
Always make certain you report all income, not just the income that comes with a 1099, ALL of it. I’ve reported a $6 stock dividend before just because I don’t want the government thinking, “He tried to hide that little bit of money, wonder if he’s hiding more? Hmm.”
In times past, you would pay for different services with whatever you had available. You might pay the doctor with a couple of goats or offer to build him a shed or give him some chickens. Today, the government wants their taxes on those goats.
If you think you’re pulling a fast one on the government by swapping your website design skills for Spanish lessons, or swapping your babysitting services for lunch at the local deli, you could be in trouble. Bartering is regulated and you could receive a form 1099-B from your teacher or the deli owner!
There’s no getting around it, you are required to to pay estimated taxes on reciprocal trades.
The Good Citizen: Jury Duty
The pay you receive from the government for serving on a jury is reported to the IRS. Fail to report that income and the IRS could send you a deficiency notice. Many employers continue paying their employees they serve on a jury, but some will request that you turn over your jury pay. If your employer demands your jury wages, you can claim an offsetting deduction on line 30 of Schedule C.
How would you like to get HALF of EVERY jackpot that’s claimed? That’s the position the government is in. You might say the IRS is the luckiest player in the world – and they never have to buy a ticket.
Tax rates on gambling winnings
The IRS taxes gambling winnings at the highest rates possible, so when you scratch that lottery ticket to reveal a cool $250k, don’t call your boss and tell him where to stick his weekly reports. Uncle Sam will take about half of your winnings right off the top, so you are likely to end up with much less than you think.
They already know
And don’t think you can keep your great luck a secret. All legal agencies that operate gambling programs are heavily (and closely) regulated. No matter if it’s the the Powerball Lottery, the Kentucky Derby or the Bellagio Hotel, they will report your winnings to the government.
We Love You Man: Bonuses and Perks
Okay, some of you will say it’s “perquisites” – whatever – you’re required to pay taxes on them in some cases. If you earn a non-cash award for service to your company, you can usually avoid taxes as long as you’ve been with the company for five years and the value of the award is below the current IRS annual limit on non-cash awards of $1,600.
For example, after 10 years of service, your company gives you a $399 three day cruise so you and your spouse can travel to Cozumel. No problem. But if the company decides to send you on a Mediterranean Cruise through the Greek Isles that costs $16,000 – problem. At least a tax problem – you WILL owe taxes on the excess ($16,000 – $1,600 = $14,400).
It’s a little different on educational reimbursements, though. The IRS allows you to exclude up to $5,250 of educational assistance, and your employer should not include the benefits with your wages, tips, and other compensation. You do not have to include these benefits on your income tax return.
The Ultimate Oxymoron: Unemployment Income
It’s ironic that the same politicians who claim they’re “for the little man” will tax the daylights out of them – even if they’re unemployed. If you lose your job, don’t expect any breaks from your government. Unemployment compensation is a form of income, and it is taxable – the federal government will efficiently send you the appropriate form to ensure you give back part of the money that your state’s unemployment fund gave you.
Death and Taxes: Life Insurance
It may come as a shock, but there are certain cases where proceeds from life insurance ARE taxable as income.
- If you were a third party recipient of a life insurance gift
- If you transferred a policy for “valuable consideration” (took out excess cash value)
- if the policy was arranged without an insurable interest based on state law (that is, if you indicated no beneficiary)
- If the policy was owned by an employer, but you benefited
Income can sneak up on you. Whether you use a tax preparer, or prepare your taxes yourself, make sure you report all of your income. You’ll sleep better.