 |
 |
 |
|||||||
 |
 |
||||||||
 |
|||||||||
|
|||||||||
Miscellaneous Income
By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com
In addition to the major categories of income, there are a number of income items that are also included in taxable income. Following is a discussion of these income items.
Bartering
Bartering is an exchange of property or services. For example, you are a CPA and prepare someone's tax return and the other party, a mechanic, does some repairs on your car in exchange. This is bartering, and the value of the goods or services received is taxable income to you. Generally, this occurs in a business context, and the value is reported on Schedule C. If you have rental property and give rent in exchange for goods or services, this is reported on Schedule E.
All exchanges are not taxable income. For example, you are a police officer and do some carpentry work for a friend who is an office worker. As a gesture of appreciation, he/she takes you out to dinner. This is not a taxable barter exchange.
Cancelled Debts
If a debt you owe is cancelled or forgiven, it is usually considered income to you. However, there are several exceptions.
- If the forgiveness was a gift or inheritance, it is not taxable.
- If the loan was a student loan under a government or other qualified program that forgives the debt if you work for a certain period of time in a specified profession it is not taxable.
- If you had paid the debt, and the payment would have been deductible, the forgiveness is not taxable. The usually applies to cash-basis taxpayers in a business context.
- If the seller reduces the price of the property you purchased after the purchase has been made, this is not considered a cancelled debt.
- If the debt was forgiven in bankruptcy the forgiveness is not taxable.
If you have taxable debt forgiveness, you should receive a 1099-B from your creditor, indicating the amount of forgiveness. This is reported as "Other Income" on line 21 of the 1040.
Be aware that creditors in bankruptcy occasionally issue 1099-B's. If this occurs, you should contact the creditor or your bankruptcy attorney, as the debt forgiveness in bankruptcy is not taxable income.
Party Host or Hostess
If you host a party at which sales are made, any gift you receive for giving the party is considered payment for helping a direct seller make sales. The gift should be reported as income at its fair market value. This is reported on line 21 of the 1040.
Any out-of-pocket expenses you incur in relation to the party are deductible expenses. These expenses are subject to the 50% limitation as meals and entertainment, and are miscellaneous itemized deductions subject to the 2% limitation.
Life Insurance
Life Insurance Proceeds paid to you because of the death of the insured individual are not normally taxable. However, if you purchased an existing policy from the owner, you will be taxed on the gain. For example, Jack has a $50,000 policy on his life, but needs some funds. You buy the policy from him for $30,000. When Jack dies, and you collect the $50,000, you have a $20,000 taxable gain. On the other hand, you purchase a $75,000 policy on your spouse naming you as beneficiary. When she dies, you collect the entire $75,000 tax-free.
If you receive the proceeds of the policy in installments, each payment consists of proceeds from the policy and earnings on the proceeds. The earnings portion of the payments is taxable income. Your life insurance company will be able to tell you how much is taxable. A 1099 will be issued, indicating the taxable portion.
If you leave the proceeds with the company, and collect interest on the proceeds, that interest is taxable.
If you surrender the policy to the insurance company and collect the cash value, the cash you receive in excess of the cost of the policy will be taxable income. The insurance company should provide you with a 1099-R indicating the proceeds and the taxable portion. Report these amounts on lines 16a and 16b of the 1040. If your proceeds are less than the cost of the policy, the loss is not deductible.
Endowment Policies are contracts in which you will be paid a specified amount of money on a certain date unless you die before that date. If you die, the proceeds are paid to your beneficiary. Endowment proceeds paid to you are taxable only if the proceeds are more than your cost.
Accelerated Death Benefits may be paid on a life insurance policy prior to the insured's death if the insured is terminally or chronically ill. This may occur through a viatical settlement. A viatical settlement is the sale or assignment of any part of the death proceeds of a life insurance policy to a viatical settlement provider meeting the requirements of section 101(g)(2)(B) of the Internal Revenue Code..
If the insured is terminally ill these proceeds are not taxable. A physician must certify that the person is not expected to live for more than 24 months.
If the person is chronically ill, the payments made on the basis of the cost of long-term care are not taxable. Payments made on a per diem or other periodic basis are excludable up to a limit.
If you are excluding accelerated death benefit payments made on a per diem or other periodic basis, you must file Form 8853 with your return.
Public Safety Officer Killed in the Line of Duty If you are a survivor of a public service officer who was killed in the line of duty, you may be able to exclude certain amounts you receive. IRS Publication 559 covers this in detail.
Partnership Income
If you are an owner of a partnership, you are taxed on your share of partnership earnings. Withdrawals from the partnership are tax-free, as you are taxed on the earnings. Your share of the earnings is reported to you on Schedule K-1. Partnership income retains its character when passed to the partners. This means that capital gains realized by the partnership are capital gains to the partner. Charitable contributions made by the partnership are deductible charitable contributions on the partners' returns. The K-1 will indicate where on your return each item should be reported.
S Corporation Income
An S corporation is a corporation that has made an election with the IRS to be taxed as a partnership. As in a partnership, you are taxed on your share of the earnings. Withdrawals are tax-free, as you are taxed on the earnings. Your share of the earnings is reported to you on Schedule K-1. S Corporation income retains its character when passed to the owners. This means that capital gains realized by the corporation are capital gains to the owners. Charitable contributions made by the corporation are deductible charitable contributions on the owners' returns. The K-1 will indicate where on your return each item should be reported.
An S corporation is entirely a creation of the tax code. When you receive your corporate charter from the state, it does not make the specification of S Corporation. To elect S Corporation treatment, the corporation should file Form 2553.
LLC's and LLP's
The IRS does not recognize LLC's and LLP's as separate types of entities. If your organization is one of these types, you must elect to be taxed as a partnership (sole proprietor if only one owner) or a corporation.
Recoveries
A recovery is a return of an amount you deducted or took a credit for in an earlier year. For example, if you took a deduction for a bad debt in a prior year, then received payment, you have a recovery. If you deducted a medical expense and were later reimbursed by the insurance company, you have a recovery.
Recoveries are governed by the tax benefit rule. This rule requires you to include a recovery in your income.
- The recovery is income in the year it is received.
- The amount to be included as income is not more than the amount of deduction or credit previously taken.
- A federal income tax refund is not included in your income as the income tax is not a deduction from your income.
If you itemized, the refund is taxable only to the amount your total itemized deductions exceeded the standard deduction. For example, if your itemized deductions totaled $10,300 and the standard deduction was $10,000 only $300 of your state tax refund would be taxable. Taxable state income tax refunds are reported to you on a 1099-G form and included on your 1040 on line 10.
Interest on Recoveries is reported as interest income in the year received.
Recovery of Itemized Deductions, other than state tax refunds, should be reported as other income on line 21 of the 1040. They are income only to the extent to which your itemized deductions exceeded the standard deduction for that year. However, they are limited to the amount deducted. For example, if you deducted $500 in medical expenses, but received a $1,500 reimbursement from the insurance company, you only report $500 in income.
Rents From Personal Property
If you rent out personal property such as equipment or vehicles, how you report the income is determined by whether the activity is considered a business and if it is actively conducted for profit.
If you are in the business of renting property, the income and expenses from the business are reported on Schedule C or C-EZ.
If you are not in the business of renting property report your rental income on line 21 of Form 1040. Rental expenses incurred should be included in the total of line 36 of the 1040 with the notation "PPR" on the dotted line next to line 36.
Royalties
Royalties are amounts you receive from copyrights, patents, and oil, gas, or mineral properties. These are taxable as ordinary income, generally reported on Schedule E.
Unemployment Benefits
Unemployment compensation is reported to you on a 1099-G. These benefits are fully taxable, reported on line 19 of the 1040, line 13 of 1040A, or line 3 of 1040-EZ.
If you receive unemployment benefits from a private unemployment fund or from a union fund, the benefits are taxable only to the extent the benefits exceed the amount you have paid in to the fund.
Other Income Items
There are a number of income sources that are taxable income. Usually, these are minor in amount but can be substantial. These are included on line 21 of the 1040 unless otherwise indicated.
Activity not for profit - Usually this is a hobby-type activity which you are pursuing more for the enjoyment rather than a profit motive. Any revenue from this type of activity is income. Expenses incurred in the activity are treated as miscellaneous itemized deductions subject to the 2% limitation. Your expenses are limited to the income from the activity.
The Alaska Permanent Fund Dividend - is taxable income.
Alimony - is taxable income, reported on line 11 of the 1040. Child support is not taxable.
Bribes and Kickbacks - you receive are includable in your income.
Campaign Contributions - received by a candidate for public office are not taxable income unless the contributions are diverted for personal use.
Court Awards and Damages - are taxable income unless they are compensation for physical injury or sickness. Normally attorney fees and court costs are not deductible from this income.
Credit Card Insurance - If you have insurance that makes the payments on your credit card in the event of disability or unemployment, the benefits received are taxable to the extent they exceed the cost of the insurance.
Employment Agency Fees - If you secure a job through an employment agency and your employer pays the fee, that is not income to you. If you pay the fee and your employer reimburses you, the amount of reimbursement must be included in income. However, your payment of the fee is a miscellaneous itemized deduction subject to the 2% limitation.
Fees for Services Fees - you receive for personal services are taxable. This would include items such as serving as a corporate director, an administrator of an estate, a notary public, or an election precinct official.
Foster Care Providers Payments - you receive to provide care to qualified foster individuals are not normally included in your income. However, payments for more than five individuals age 19 or under are taxable.
Found Property - If you find and keep property (not your own) that has been lost or abandoned, the fair market value is taxable income to you.
Free Tour - If you organize a tour and the travel agency gives you a free tour the value of the tour is taxable income.
Gambling Winnings Legal - and illegal gambling winnings are taxable. You should receive a W-2G for gambling winnings in excess of $600, but all winnings are taxable regardless of amount. You may deduct your gambling losses as a miscellaneous itemized deduction on Schedule A. These are not subject to the 2% limitation.
Illegal Income - such money from drug-dealing, is taxable income and should be included on line 21 of the 1040 or on Schedule C. Strange as this may sound, this is how infamous gangster Al Capone was ultimately caught. He was charged by the Treasury Department with tax evasion and was subsequently convicted.
Jury Duty - Jury pay that you receive must be included in your income. If you must give the pay to your employer because your employer continues your salary while serving on the jury, the amount repaid your employer may be deducted on line 36 of the 1040. Enter "Jury Pay" and the amount on the dotted line next to line 36.
Prizes and Awards - If you win a prize in a lucky number drawing, radio or television show, contest, or other event you must include the fair market value in your income. If you refuse the prize, you can exclude it from your income.
Employee Awards or Bonuses - Generally these are includable in your income as wages and will be reflected on your W-2. Certain noncash employee achievement awards may be excluded, however.
Rewards - If you receive a reward for providing information it is included in your income.
Stolen Property - If you steal property, the fair market value should be included as income in the year you steal it unless you return it to its rightful owner.
________________________________________
Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.
 |
© 2005-2010 webTAXcenter.com, a TaxHawk, Inc. owned and operated web site