- Personal Finance
Cultural Competency and the Tax Code: What Is Reportable Income?
Reportable Income: Who Knew?
Making a mistake on one's tax return can be costly and can cause sometimes years of frustration in ironing the problem out, while many times, also paying penalties and interest. The following charts aim to inform, clarify, and differentiate between the different line items that are reportable and those that are not.
The first list to be discussed is reportable income in the chart below:
lottery tickets, bingo, cars, cruises, boats, yard sales, and ebay sales
Social Security Benefits
There may be a % that is taxable if you have other sources of income or tax a job to supplement your social security wages.
Cancellation of Debt
Dependent on type
FULL amount of unemployment benefits are taxable.
Paychecks, cash wages, daycare wages, Alimony, Rent Income, and Interest on bank accounts, investments, etc.
Be careful what you wish for! If you win that trip on the radio or the car at the local raffle, it can be thrilling to hear, "Congratulations! You've won prize winnings worth...." and that's where the excitement ends, because once you hear the amount of the worth of the prize winnings, it is considered income. In fact, cash and prize winnings are added to your income, so for example, if you make $20,000 per year and win a car worth $40,000, you have, for all intents and purposes, made $60,000 during that tax year.
If you do win a prize, better to ask for a cash option, if there is one, because you will at least have the money to pay the taxes, once you learn the tax consequences of your newfound fortune! In the case of winning a car, it would be far better to take the cash option or if you must, accept the car and sell it afterwards, so that you will have enough money to pay the tax bill!
So, the next time you watch a game show on television and see the winners jumping up and down for joy, just remember that they haven't exited the stage yet where they sign off on their winnings and their tax obligation!
Who Will Know if......?
Prize winnings on television, of course, are public for everyone to see you winning, so it is understandable that due to the exposure, they are undeniably reportable. Other items, however, are equally as reportable income, even though you might think they are more private. Consider this: many communities require yard sales to be registered at the local town hall. To redeem lottery ticket winnings past a certain amount, one has to sign the back of the ticket. Many times, prize winnings at bingo halls require some type of paperwork and while internet sales occur in a private password-protected account, nothing on the internet is really private. Keeping this in mind will come as great benefit to you in the long run.
SOCIAL SECURITY BENEFITS
If you are collecting Social Security and then take a job for supplemental income, or if you receive other sources of income, such as those listed in this list or if through any other means of payment you have alternate sources of income, you may be assessed a percentage on those wages on which you may have to pay tax.
While all cases are individual, it is best to consult your tax preparer to ensure that you are in compliance to avoid any problems that may occur as a result of this extra income.
CANCELLATION OF DEBT
Some types of loan forgiveness may or may not be reportable, depending on the type of cancellation of debt and the circumstances and statutes under which it was granted. For instance, if you charge off all of your credit card debt but do not claim bankruptcy, the amount charged off (forgiven) may be reportable as taxable income.
Consult your tax preparer to ensure that you have fully reported any taxable/reportable debt that has been forgiven.
If you receive unemployment benefits, make sure that you have the taxes deducted from the check before it gets deposited into your account! One would think that if you are unemployed, that you can't afford to not have all the money from the check, as debt mounts from being unemployed in the first place, you will be glad that you aren't faced with additional tax debt to the U.S. government.
In some states, you are given the option to have the tax taken out, while in other states, the tax comes out automatically. Just be aware that it is not always an automatic deduction and you may have to opt for it! You will be glad you knew!
WAGES AND EARNINGS
If you are a wage earner in any capacity, you must report this income - not just from W-2 and 1099 official statements, but in particular - if someone pays you cash for certain services, that person may in turn write that service off, name as the provider of the service, which may result in you receiving a letter from the IRS, inquiring about the "wages" paid to you.
Alimony, or monetary compensation paid by one spouse to another, is considered income and is reportable. Please note the difference in accountability and tax liability between Child Support and Alimony in the next chart.
The Smith family has four children, two of whom go to your daycare that you informally conduct out of your home. Their income level is such that they fit the parameters for writing off the amount of money they pay to you for providing daycare to their two children. They pay you in cash, but they keep a record of it. They write the amount of daycare off, and name you as the provider of those service, exposing your name and 1040 to a possible inquiry.
While you might think that rent cannot be written off, consider this scenario: Ryan is self-employed and works from home and lives with friends. He pays the friends rent, but he pays it in cash. As part of his 1099 living expenses, Ryan's tax preparer deems him eligible to write off a portion of his rent payment, naming his friends are the recipient of this income at the indicated address. This now exposes his friends to possible inquiries.
The bottom line is that just because cash is paid in certain transactions, it may still be reportable as income. Being aware and being transparent in your finances now will ensure clear sailing through tax time later!
Social Security *
Social Security Disability
Non-Reportable Income Explanation
There is no need to report the items in the above list. Please note, two things, however:
a) Social Security is not reportable as a sole source of income.
b) Tax credits - so, the Earned Income Tax Credit, the Child Tax Credit, and other tax credits are not reportable, taxable income.
Next article in this series: Cultural Competency and Knowing Who Will Do Your Taxes