Unfortunately, some of us get into trouble when we have other types of income that raise our tax bills. And when we forget to pay the taxes on that extra income — or we don’t have the extra income to pay those tax bills — we go into tax debt.
Fortunately there are payment plans available from the IRS to pay that tax debt. There are also special programs such as the Fresh Start Program and the Offer In Compromise Program that you might qualify for in certain cases.
But it’s better not to get into tax debt in the first place, so let’s look at those other types of taxable income and hopefully you’ll be ready for the extra tax bills they might bring. Be sure to mention these when you talk with your tax professional if you have a professional file your taxes.
Let’s say you collect coins or fine art prints or Barbie dolls, or hood ornaments from cars. You might sell one or more of the pieces in your collection in order to buy another piece. If your selling price represents a profit you have taxable income. Yes, a profitable hobby can increase your tax bill.
If you find and keep property that doesn’t belong to you that has been lost or abandoned, it’s taxable to you at its fair market value in the first year it’s your undisputed possession. So if you’re walking along and find a diamond ring — and after a period of time the police department says it’s yours — congratulations, you have a taxable find.
If a travel agency asks you to organize your friends into a tour group, and you received a free tour for organizing the group of tourists, you must include its value in your income. You report the fair market value of the tour.
You must include your gambling winnings in your income on Schedule 1 (Form 1040), line 8b. Winnings from fantasy sports leagues are gambling winnings. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings.
There’s a big mistake many gamblers make. Many gamblers do not report their small gambling wins such as the wins from a $10 scratch-off lottery ticket that might give you $75. But the fact is even small wins without a tax form like a W2G are taxable.
Remember that if you receive a jackpot ($1200 or more for certain casino bets) you will be issued a form W2G. The IRS will also get a copy of that W2G so don’t ignore it and certainly don’t forget about it when you file your taxes because the IRS computers will be looking for it when it gets your tax return. If you don’t offset the W2G and other casino and gambling wins with losses, you will be taxed on the wins. This is why it is so important that you keep a log of all of your gambling — wins and losses.
LOTTERIES AND RAFFLES
Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes.
GIFTS AND INHERITANCE
In most cases, property you receive as a gift, bequest, or inheritance isn’t included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
In a simple example, you inherit money from a deceased relative. The amount of money you receive as inheritance is tax free. But you put that inherited money into a bank account and the bank account pays interest — and that interest is taxable.
In another example, you inherit a house worth $300,000 and you later sell the house for $400,000. The profit on the house is taxable.
Discuss this information in detail with your tax professional.
WHEN YOU CAN’T PAY YOUR TAX BILL
When you have these unusual income items you just might not be prepared for the tax bills that follow. Remember, the IRS does offer payment plans in many cases and in some cases you might qualify for a Fresh Start or an Offer In Compromise — but this isn’t likely if the IRS sees that you just came into a windfall.
CALL FOR A FREE CONSULTATION
Our tax professionals can discuss with you who is really eligible for a Fresh Start Program or an Offer In Compromise Program. Call us for a free consultation. In less than 15 minutes we can tell you if you qualify for an IRS Fresh Start Initiative or an Offer In Compromise Program. If you don’t qualify for a Fresh Start Program or an Offer In Compromise Program there are other options we can discuss with you to resolve your IRS debt issues. The phone call is also free so you have nothing to lose. Make the call.
Lottery and casino jackpot winners are likely going to have to find other ways to handle their tax bills. This is why you sometimes hear about winners of certain merchandise selling that merchandise — houses, cars, RVs, and such — because they can’t pay the taxes on them.