Are You Reporting All of Your Income?
The IRS is stepping up its efforts to close the tax gap and taxpayers who underreport income are their prime targets. For those of you who are unaware, the tax gap, or the amount of taxes that go unpaid each year, results from taxpayers underreporting their taxable income. Current estimates place the tax gap at nearly $350 billion. Fortunately most of you want to pay your fair share of taxes, and others simply need a better understanding of their obligations.
While most of you are aware you must include wages, salaries, interest, dividends, tips, and commissions as income on your tax returns, many don't realize that you must also report other income, such as:
• Cash earned from side jobs;
• Barter exchanges of goods or services;
• Awards, prizes, contest winnings; and
• Gambling proceeds.
You are required to report all income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands. Generally, the IRS considers all income received in the form of money, property, or services to be taxable income unless the law specifically provides an exemption.
It is a common misconception that if a self-employed taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that you may exclude from gross income. All income earned through your business, as an independent contractor, or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040.
Independent contractors must report all income as taxable, even if it is less than $600. Even if the your client does not issue you a Form 1099-MISC, you must report the income, whatever the amount.
Fees received for babysitting, housecleaning, and lawn care are all examples of taxable income, even if you are paid less than $600 for the year.
Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties to the exchange. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. Income from bartering is taxable in the year in which you received the goods or services.
Subject to certain exceptions, the cash value of prizes or awards won in a drawing, quiz show program, beauty contest, or other event must be included as taxable income. You must also include as taxable income the fair market value of merchandise or products you won as a prize or award.
Gambling winnings are fully taxable regardless of the amount. Gambling income includes winnings from lotteries, raffles, horse races, poker tournaments, slots, and casino games. It includes cash winnings as well as the fair market value of prizes such as cars, boats, and trips.
Even if you are not issued Form W-2G, all gambling winnings must be reported as taxable income regardless of whether any portion is subject to withholding. In addition, you may be required to pay an estimated tax on the gambling winnings. Losses may be deducted only if you itemize your deductions and only if you also report gambling winnings. The losses you deduct may not be more than the gambling income you report on your return.
The general rule is that all income, from whatever source, is taxable unless there is a specific exclusion. For example, a gift is not taxable to you even if it is a gift of money. The thing to keep in mind is that the IRS is on the look-out for underreported income and is known for employing some crafty ways to find it.
This article is brought to you by Peter Tuttle, CPA. You may contact me by sending an e-mail via the link to the right of my active rain blog page. Please visit my website at http://www.petertuttlecpa.com/
"I help individuals, families, small-businesses & non-profits with their income tax & insurance needs."
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