Drowning in taxes?
5 items you may have overlooked,
Cash is a funny thing. We want more of it during most of the year, but when tax season hits, well, we’d prefer to forget about some dough we picked up along the way. Say those small wins at the slot machine? Or the money you saved when a lender “forgave” some credit card debt?
Plenty of things — many involving cash — are taxable income whether tax filers realize it or not.
As we edge closer to the April 18 filing deadline, let’s examine some items beyond your paycheck that you should treat as income on a tax return. Here’s a look at five possibilities:
1 THE OFFICE POOL
If you fill out a winning bracket for the NCAA men’s basketball tournament, you need to know that gambling winnings, no matter how small, are fully taxable and should be reported on Line 21 of the 1040 federal tax return as “other income.”
The “other income” reporting applies to recreational gamblers.
Whether you would receive a Form W-2G will vary based on the dollar amount of the winnings and the type of gambling, such as whether you won at a slot machine or a poker tournament.
For example, you’d receive a W-2G if you won $1,200 or more at once from slot machines at one casino on a single day. (The Internal Revenue Service notes: If the winnings aren’t paid in cash, the fair market value of the item won is taxable).
You’d receive a W-2G if you re- ceived more than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament.
The amount of gambling losses in a given year that may be deductible on federal income taxes is limited by the extent of your winnings. If you lost $5,000 but won $1,500, for example, you can only deduct $1,500 in losses. To take that deduction, you’d have to itemize deductions on Schedule A and not take the standard deduction.
Experts at H&R Block note that you should keep an accurate diary of your gambling activity. See Publication 529 for Miscellaneous Deductions. You’d need dates of wagering and locations. Paperwork could include copies of Keno tickets, copies of casino credit records, unlucky lottery tickets and the like to back you up in case of an audit.
The gambling deduction is a miscellaneous deduction but it doesn’t need to take into account your income. Typically, only the amount of miscellaneous deductions that exceeds 2% of adjusted gross income is deductible. But when it comes to gambling losses, the threshold does not apply.
Will you get caught by the IRS for not reporting an office pool win? Maybe not. But if you are, you could be hit with interest and penalties. Tax experts say unreported income can come up during audits.
2 CASH FROM A HOBBY
Rejuvenating vintage furniture might be a trendy way to make extra cash. But during tax season, that extra cash can be taxable.
The IRS notes: “You must report any income you get from a hobby on your tax return.”
So if you spend $5 on an old wooden chair and turn it into up- scale furniture that you’re able to sell for $150, you’re looking at extra income.
“All income is taxable regardless of whether it’s reported on a 1099,” said Mike Slack, lead tax research analyst for the Tax Institute at H&R Block.
You don’t have to claim things you sell at a loss, such as items at a garage sale. The same is true if you received $75 for a chair you paid $150 for 10 years ago and then sold on Craigslist.
Where people can get into more trouble, though, is when they try to deduct expenses for their hobbies. The rules are far more tricky. As a general rule, the IRS notes you can only deduct your hobby expenses up to the amount of income that you generated from that hobby.
3 JOBLESS BENEFITS
Maybe you didn’t have a job for part of 2016. But if you collected unemployment benefits, you need to include all unemployment compensation as income for the year.
Taxpayers need to dig in their paperwork for the 1099- G, Certain Government Payments, which you should have received by now. On the 1099- G, you’ll find the dollar amount of jobless benefits you received and any amount of federal income tax that might have already been withheld.
4 ALIMONY
If you pay it, you can deduct it from income. But if you receive alimony, it’s counted as part of your income.
Remember, though, we’re not talking about child support here. Child support will not count as income or be taxable for the person receiving it, and it’s not deductible if you paid it.
You’d reduce income for alimo- ny you paid to an ex-spouse on Line 31a of the 1040 return. And you’d list the recipient’s Social Security number next to it.
You’d add alimony received to your income on Line 11 of the 1040 return.
A trouble spot can crop up when the ex-spouses don’t report the same figures.
5 FORGIVEN DEBT
Did you get a slip of paper called a Form 1099-C — the Cancellation of Debt?
“I’ve found that it’s a new document to most taxpayers and they might not understand that it can be taxable,” said Marshall Hunt, certified public accountant and director of tax policy for the Accounting Aid Society’s tax as- sistance program in metro Detroit.
“As a general rule, cancellation of debt is taxable,” Hunt said. “However, there are exclusions.”
See IRS Publication 4681 for information on canceled debt, foreclosures, repossessions and abandonment. Do not ignore the 1099-C. The IRS receives a copy of that 1099-C.
A 1099-C is issued by lenders if $600 or more is forgiven or canceled. Maybe it’s for credit card debt that’s been forgiven or canceled or it’s related to a foreclosure. In general, you’ll report canceled debt on Line 21 on the 1040 for “other income.” But you don’t need to include that amount, if there’s an exclusion available to you.