OTHER INCOME
See also:
Publication 550 Investment Income and Expenses
Publication 525 Taxable & Nontaxable Income
Publication 1244 Employee's Daily Record of Tips
Publication 531 Reporting Tip Income
Publication 535 Business Expenses
Publication 550 Investment Income and Expenses
Publication 525 Taxable & Nontaxable Income
Publication 531 Reporting Tip Income
Publication 535 Business Expenses
Tax Tips About Hobbies that Earn Income
Millions of people enjoy hobbies. They can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income is different than how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are basic tax tips you should know if you get income from your hobby:
- 1. Business versus Hobby. A key feature of a business is that you do the activity to make a profit. This differs from a hobby that you may do for sport or recreation. There are nine factors to consider when you determine if you do the activity to make a profit. Make sure you base your decision on all the facts and circumstances of your situation. Refer to Publication 535 Business Expenses to learn more. You can also visit IRS.gov and type "not-for-profit" in the search box.
- 2. Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
- 3. Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can't deduct that loss from your other income.
- 4. How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
Bartering Income: The Value of Property or Services You Receive
Bartering is the trading of one product or service for another. Often there is no exchange of cash. Some businesses barter to get products or services they need. For example, a gardener might trade landscape work with a plumber for plumbing work.
If you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business.
Here are a few facts about bartering:
If you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business.
Here are a few facts about bartering:
- Bartering income. Both parties must report the fair market value of the product or service they get as income on their tax return.
- Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Exchanges must give a copy of the form to its members who barter each year. They must also file a copy with the IRS.
- Trade Dollars. Exchanges trade barter or trade dollars as their unit of exchange in most cases. Barter and trade dollars are the same as U.S. currency for tax purposes. If you earn trade and barter dollars, you must report the amount you earn on your tax return.
- Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
- Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
Seven Tips to Help You Determine if Your Gift is Taxable
If you gave money or property to someone as a gift, you may wonder about the federal gift tax. Many gifts are not subject to the gift tax. Here are seven tax tips about gifts and the gift tax.
1. Nontaxable Gifts. The general rule is that any gift is a taxable gift. However, there are exceptions to this rule. The following are not taxable gifts:
2. Annual Exclusion. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2014 and 2015, the annual exclusion is $14,000.
3. No Tax on Recipient. Generally, the person who receives your gift will not have to pay a federal gift tax. That person also does not pay income tax on the value of the gift received.
4. Gifts Not Deductible. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
5. Forgiven and Certain Loans. The gift tax may also apply when you forgive a debt or make a loan that is interest-free or below the market interest rate.
6. Gift-Splitting. You and your spouse can give a gift up to $28,000 to a third party without making it a taxable gift. You can consider that one-half of the gift be given by you and one-half by your spouse.
7. Filing Requirement. You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
1. Nontaxable Gifts. The general rule is that any gift is a taxable gift. However, there are exceptions to this rule. The following are not taxable gifts:
- Gifts that do not exceed the annual exclusion for the calendar year,
- Tuition or medical expenses you paid directly to a medical or educational institution for someone,
- Gifts to your spouse (for federal tax purposes, the term “spouse” includes individuals of the same sex who are lawfully married),
- Gifts to a political organization for its use, and
- Gifts to charities.
2. Annual Exclusion. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2014 and 2015, the annual exclusion is $14,000.
3. No Tax on Recipient. Generally, the person who receives your gift will not have to pay a federal gift tax. That person also does not pay income tax on the value of the gift received.
4. Gifts Not Deductible. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
5. Forgiven and Certain Loans. The gift tax may also apply when you forgive a debt or make a loan that is interest-free or below the market interest rate.
6. Gift-Splitting. You and your spouse can give a gift up to $28,000 to a third party without making it a taxable gift. You can consider that one-half of the gift be given by you and one-half by your spouse.
7. Filing Requirement. You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that amount to more than the annual exclusion for the year.
- You and your spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- You gave someone (other than your spouse) a gift of a future interest that they can’t actually possess, enjoy, or from which they’ll receive income later.
- You gave your spouse an interest in property that will terminate due to a future event.
How to Determine if the Net Investment Income Tax Applies to You
If you have income from investments, you may be subject to the Net Investment Income Tax. You may owe this tax if you receive investment income and your income for the year is more than certain limits. Here are some key tips you should know about this tax:
• Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.
• Income threshold amounts. You may owe this tax if your modified adjusted gross income is more than the following amount for your filing status:
• Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.
• Income threshold amounts. You may owe this tax if your modified adjusted gross income is more than the following amount for your filing status:
|
Filing Status
Single or Head of household Married filing jointly Married filing separately Qualifying widow(er) with a child |
Threshold Amount
$200,000 $250,000 $125,000 $250,000 |
• Net investment income. This amount generally includes income such as:
o Interest,
o Dividends,
o Capital gains,
o Rental and royalty income, and
o Non-qualified annuities.
This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. It also does not include any gain from the sale of your main home that you exclude from your income.
Refer to Form 8960, Net Investment Income Tax, to see if this tax applies to you. You can check the form’s instructions for the details on how to figure the tax.
• How to report. If you owe the tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty
o Interest,
o Dividends,
o Capital gains,
o Rental and royalty income, and
o Non-qualified annuities.
This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. It also does not include any gain from the sale of your main home that you exclude from your income.
Refer to Form 8960, Net Investment Income Tax, to see if this tax applies to you. You can check the form’s instructions for the details on how to figure the tax.
• How to report. If you owe the tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty
What You Should Know if You Get Tipped at Work
If you get tips on the job, you should know some things about tips and taxes. Here are a few tips from the IRS to help you file and report your tip income correctly:
• Show all tips on your return. You must report all tips you receive on your federal tax return. This includes the value of tips that are not in cash. Examples include items such as tickets, passes or other items.
• All tips are taxable. You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. It also includes your share of tips received under a tip-splitting agreement with other employees.
• Report tips to your employer. If you receive $20 or more in tips in any one month, you must report your tips for that month to your employer. You should only include cash, check and credit card tips you received. Do not report the value of any non-cash tips on this report. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
• Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips. This will help you report the correct amount of tips on your tax return.
For more on this topic, see Publication 531, Reporting Tip Income. You can get it on IRS.gov.
• Show all tips on your return. You must report all tips you receive on your federal tax return. This includes the value of tips that are not in cash. Examples include items such as tickets, passes or other items.
• All tips are taxable. You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. It also includes your share of tips received under a tip-splitting agreement with other employees.
• Report tips to your employer. If you receive $20 or more in tips in any one month, you must report your tips for that month to your employer. You should only include cash, check and credit card tips you received. Do not report the value of any non-cash tips on this report. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
• Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips. This will help you report the correct amount of tips on your tax return.
For more on this topic, see Publication 531, Reporting Tip Income. You can get it on IRS.gov.
Four Things to Know about Net Investment Income Tax
Starting in 2013, some taxpayers may be subject to the Net Investment Income Tax. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are four things from the IRS that you should know about this tax:
1. Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.
2. Net investment income. This amount generally includes income such as:
This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.
After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Refer to the instructions for Form 8960, Net Investment Income Tax for more on how to figure your net investment income or MAGI.
3. Income threshold amounts. You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:
Filing Status Threshold Amount
Single or Head of household $200,000
Married filing jointly $250,000
Married filing separately $125,000
Qualifying widow(er) with a child $250,000
4. How to report. If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty
1. Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.
2. Net investment income. This amount generally includes income such as:
- interest
- dividends
- capital gains
- rental and royalty income
- non-qualified annuities
This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.
After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Refer to the instructions for Form 8960, Net Investment Income Tax for more on how to figure your net investment income or MAGI.
3. Income threshold amounts. You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:
Filing Status Threshold Amount
Single or Head of household $200,000
Married filing jointly $250,000
Married filing separately $125,000
Qualifying widow(er) with a child $250,000
4. How to report. If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty
Four Things You Should Know if You Barter
Bartering is the trading of one product or service for another. Often there is no exchange of cash. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services.
If you barter, you should know that the value of products or services from bartering is taxable income.
Here are four facts about bartering:
1. Barter exchanges A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.
2. Bartering income Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
3. Tax implications Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
4. Reporting rules How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
If you barter, you should know that the value of products or services from bartering is taxable income.
Here are four facts about bartering:
1. Barter exchanges A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.
2. Bartering income Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
3. Tax implications Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
4. Reporting rules How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
Important Reminders about Tip Income
If you get tips on the job from customers, the IRS has a few important reminders:
- Tips are taxable. You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
- Include all tips on your return. You must include the total of all tips you received during the year on your income tax return. This includes tips directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
- Report tips to your employer. If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips. Do not report the value of any non-cash tips to your employer.
- Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.
IRS Tips about Taxable and Nontaxable Income
Are you looking for a hard and fast rule about what income is taxable and what income is not taxable? The fact is that all income is taxable unless the law specifically excludes it.
Taxable income includes money you receive, such as wages and tips. It can also include non-cash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Some types of income are not taxable except under certain conditions, including:
Here are some types of income that are usually not taxable:
Taxable income includes money you receive, such as wages and tips. It can also include non-cash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Some types of income are not taxable except under certain conditions, including:
- Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
- If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.
Here are some types of income that are usually not taxable:
- Gifts and inheritances
- Child support payments
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
Important Reminders about Tip Income
If your pay from your job includes tips, the IRS has a few important reminders about tip income:
- Tips are taxable. Individuals must pay federal income tax on any tips they receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
- Include all tips on your return. You must include all tips that you receive during the year on your income tax return. This includes tips you received directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
- Report tips to your employer. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips.
- Keep a daily log of tips. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.
Taxable and Nontaxable Income
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.
- Child support payments;
- Gifts, bequests and inheritances;
- Welfare benefits;
- Damage awards for physical injury or sickness;
- Cash rebates from a dealer or manufacturer for an item you buy; and
- Reimbursements for qualified adoption expenses.
- Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.
If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.
Dividends
Dividends are distributions of property (which can include money, stock of another corporation or other property) a corporation pays you because you own stock in that corporation. You also may receive dividends through a partnership, an estate, a trust, a subchapter S corporation or from an association that is taxable as a corporation. Most dividends are paid in cash. A shareholder of a corporation may be deemed to receive a dividend if the corporation pays the debt of its shareholder, the shareholder receives services from the corporation, or the shareholder is allowed the use of the corporation's property. A shareholder may also receive distributions such as additional stock or stock rights in the distributing corporation; such distributions may or may not qualify as dividends.
You should receive a Form 1099-DIV (PDF), Dividends and Distributions, from each payer for distributions of $10.00 or more. Also, if you receive dividends through a partnership, an estate, a trust, or a subchapter S corporation, you should receive a Schedule K-1 from that entity indicating the amount of dividends taxable to you. You must report all taxable dividends even if you do not receive a Form 1099–DIV or Schedule K-1.
Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains.
Distributions that qualify as a return of capital are not dividends. A return of capital is a return of some or all of your investment in the stock of the company. A return of capital reduces the basis of your stock. For information on Basis of Assets, refer to Topic 703. A distribution generally qualifies as a return of capital if the corporation making the distribution does not have any accumulated or current year earnings and profits. Once the basis of your stock has been reduced to zero, any further non-dividend distribution is capital gain.
Capital gain distributions may be paid by regulated investment companies (mutual funds) and real estate investment trusts (REITs). Capital gain distributions are always reported as long-term capital gains. You must also report any undistributed capital gain that mutual funds or REITs have designated to you in a written notice. Those undistributed capital gains are reported to you on Form 2439 (PDF). Please refer to the Form 1040 Instructions or Form 1040A Instructions for information on how to report qualifying dividends and capital gain distributions.
Form 1099-DIV should break down the distribution into the various categories. If it does not, contact the payer.
You must give your correct social security number to the payer of your dividend income. If you do not, you may be subject to a penalty and/or back-up withholding. Refer to Topic 307 for more information on back-up withholding.
If you receive dividends in significant amounts, you may have to pay estimated tax.
You should receive a Form 1099-DIV (PDF), Dividends and Distributions, from each payer for distributions of $10.00 or more. Also, if you receive dividends through a partnership, an estate, a trust, or a subchapter S corporation, you should receive a Schedule K-1 from that entity indicating the amount of dividends taxable to you. You must report all taxable dividends even if you do not receive a Form 1099–DIV or Schedule K-1.
Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains.
Distributions that qualify as a return of capital are not dividends. A return of capital is a return of some or all of your investment in the stock of the company. A return of capital reduces the basis of your stock. For information on Basis of Assets, refer to Topic 703. A distribution generally qualifies as a return of capital if the corporation making the distribution does not have any accumulated or current year earnings and profits. Once the basis of your stock has been reduced to zero, any further non-dividend distribution is capital gain.
Capital gain distributions may be paid by regulated investment companies (mutual funds) and real estate investment trusts (REITs). Capital gain distributions are always reported as long-term capital gains. You must also report any undistributed capital gain that mutual funds or REITs have designated to you in a written notice. Those undistributed capital gains are reported to you on Form 2439 (PDF). Please refer to the Form 1040 Instructions or Form 1040A Instructions for information on how to report qualifying dividends and capital gain distributions.
Form 1099-DIV should break down the distribution into the various categories. If it does not, contact the payer.
You must give your correct social security number to the payer of your dividend income. If you do not, you may be subject to a penalty and/or back-up withholding. Refer to Topic 307 for more information on back-up withholding.
If you receive dividends in significant amounts, you may have to pay estimated tax.
Tips – Withholding and Reporting
Employees who receive tips of $20 or more in a calendar month while working for you, are required to report to you the total amount of tips they receive. They must give you written reports by the tenth of the following month. Employees who receive tips of less than $20 in a calendar month are not required to report their tips to you.
Employees must report to you cash tips received directly from customers, tips from other employees, and tips customers charge to their bills. Service charges added to a bill and paid to your employees are not considered tips for tax reporting purposes. These service charges constitute wages for purposes of social security, Medicare, and income taxes.
Employees can use Form 4070A, Employee's Daily Record of Tips, to keep a daily record of their tips and Form 4070, Employee's Report of Tips to Employer, to report their tips to you. Both of these forms are in Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer.
When you receive the tip report from your employee, use it to figure the amount of social security, Medicare, and income taxes to withhold for the pay period on both wages and reported tips. You are responsible for paying the employer's portion of the social security and Medicare taxes. You must collect the employee's portion of the social security and Medicare taxes and the income taxes. You can collect these taxes from the employee's wages or from other funds the employee gives you up to the close of the calendar year. If you don't have enough money from the employee's wages and other funds, apply the amounts available in the following order. First, withhold all taxes due on regular wages. Second, withhold social security and Medicare taxes due on reported tips. Finally withhold any federal, state or local income taxes on reported tips. You can withhold any remaining unpaid taxes from the employee's next paycheck. If you cannot collect all of the employee's social security and Medicare taxes on tips, show the uncollected amount in the appropriate box on the employee's Form W-2, Wage and Tax Statement. Also, show the uncollected amount as an adjustment on your employment tax return (e.g., Form 941 (PDF), Employer's Quarterly Federal Tax Return).
When preparing your employee's Form W-2, include wages, tips and other compensation in the box labeled "Wages, tips, other compensation". Include Medicare wages and tips, and social security tips in their appropriate boxes.
When figuring your liability for federal unemployment tax, add the reported tips to your employee's wages.
If you operate a large food or beverage establishment where tipping is customary, and food or beverage is provided for consumption on the premises, and you normally employ more than ten people who work more than 80 hours on a typical business day, you must file Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips, for each calendar year. If you have more than one food or beverage establishment, you must file a separate Form 8027 for each. Form 8027 is due on the last day of February of the next year (or March 31st if you are filing electronically).
If the total tips reported by all employees are less than 8 percent of your gross receipts (unless a lower rate has been approved by the IRS), you must allocate the difference among the employees who received tips. The allocation may be based on each employee's share of gross receipts or share of total hours worked, or on a written agreement between you and your employees. Show the amount allocated in the box labeled, "Allocated Tips", of the employee's Form W-2. Do not withhold income, social security or Medicare taxes on allocated tips.
If you are required to allocate tips, your employees must continue to report all tips to you, and you must use the amounts they report to figure payroll taxes.
Employers may participate in the Tip Rate Determination and Education Program. The program primarily consists of voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. These voluntary compliance agreements offer many benefits for the employer and the employee. Two of the agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the Gaming (casino) industry. Additionally, the IRS is offering an expanded tip reporting and education program for food and beverage industry employers called the Attributed Tip Income Program (ATIP). ATIP has simple enrollment requirements and procedures. To find out more about the program or to identify the IRS contact for your state, call the IRS at 800-829-4933. To get more information about ATIP, GITCA, TRDA, or TRAC agreements, access the IRS website at www.irs.gov and search for Market Segment Understanding (MSU) agreements: search for keyword "MSU tips". You can also get Publication 1461, ATIP - Attributed Tip Income Program.
For more information on employer responsibilities, refer to Publication 15, (Circular) E, Employer's Tax Guide. For more information on employee responsibilities, refer to Publication 531, Reporting Tip Income.
Employees must report to you cash tips received directly from customers, tips from other employees, and tips customers charge to their bills. Service charges added to a bill and paid to your employees are not considered tips for tax reporting purposes. These service charges constitute wages for purposes of social security, Medicare, and income taxes.
Employees can use Form 4070A, Employee's Daily Record of Tips, to keep a daily record of their tips and Form 4070, Employee's Report of Tips to Employer, to report their tips to you. Both of these forms are in Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer.
When you receive the tip report from your employee, use it to figure the amount of social security, Medicare, and income taxes to withhold for the pay period on both wages and reported tips. You are responsible for paying the employer's portion of the social security and Medicare taxes. You must collect the employee's portion of the social security and Medicare taxes and the income taxes. You can collect these taxes from the employee's wages or from other funds the employee gives you up to the close of the calendar year. If you don't have enough money from the employee's wages and other funds, apply the amounts available in the following order. First, withhold all taxes due on regular wages. Second, withhold social security and Medicare taxes due on reported tips. Finally withhold any federal, state or local income taxes on reported tips. You can withhold any remaining unpaid taxes from the employee's next paycheck. If you cannot collect all of the employee's social security and Medicare taxes on tips, show the uncollected amount in the appropriate box on the employee's Form W-2, Wage and Tax Statement. Also, show the uncollected amount as an adjustment on your employment tax return (e.g., Form 941 (PDF), Employer's Quarterly Federal Tax Return).
When preparing your employee's Form W-2, include wages, tips and other compensation in the box labeled "Wages, tips, other compensation". Include Medicare wages and tips, and social security tips in their appropriate boxes.
When figuring your liability for federal unemployment tax, add the reported tips to your employee's wages.
If you operate a large food or beverage establishment where tipping is customary, and food or beverage is provided for consumption on the premises, and you normally employ more than ten people who work more than 80 hours on a typical business day, you must file Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips, for each calendar year. If you have more than one food or beverage establishment, you must file a separate Form 8027 for each. Form 8027 is due on the last day of February of the next year (or March 31st if you are filing electronically).
If the total tips reported by all employees are less than 8 percent of your gross receipts (unless a lower rate has been approved by the IRS), you must allocate the difference among the employees who received tips. The allocation may be based on each employee's share of gross receipts or share of total hours worked, or on a written agreement between you and your employees. Show the amount allocated in the box labeled, "Allocated Tips", of the employee's Form W-2. Do not withhold income, social security or Medicare taxes on allocated tips.
If you are required to allocate tips, your employees must continue to report all tips to you, and you must use the amounts they report to figure payroll taxes.
Employers may participate in the Tip Rate Determination and Education Program. The program primarily consists of voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. These voluntary compliance agreements offer many benefits for the employer and the employee. Two of the agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the Gaming (casino) industry. Additionally, the IRS is offering an expanded tip reporting and education program for food and beverage industry employers called the Attributed Tip Income Program (ATIP). ATIP has simple enrollment requirements and procedures. To find out more about the program or to identify the IRS contact for your state, call the IRS at 800-829-4933. To get more information about ATIP, GITCA, TRDA, or TRAC agreements, access the IRS website at www.irs.gov and search for Market Segment Understanding (MSU) agreements: search for keyword "MSU tips". You can also get Publication 1461, ATIP - Attributed Tip Income Program.
For more information on employer responsibilities, refer to Publication 15, (Circular) E, Employer's Tax Guide. For more information on employee responsibilities, refer to Publication 531, Reporting Tip Income.
Taxable or Non-Taxable Income
Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.
The IRS offers the following list of items that do not have to be included as taxable income:
These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income.
The IRS offers the following list of items that do not have to be included as taxable income:
- Adoption expense reimbursements for qualifying expenses
- Child support payments
- Gifts, bequests and inheritances
- Workers’ compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
- Meals and lodging for the convenience of your employer
- Compensatory damages awarded for physical injury or physical sickness
- Welfare benefits
- Cash rebates from a dealer or manufacturer
- Life insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
- Scholarship or fellowship grant If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
- Non-cash income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.
These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income.
Earnings for Clergy
The services you perform in the exercise of your ministry are generally subject to self-employment tax for social security purposes. See Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, for limited exceptions from self-employment tax.
Even though, for social security tax purposes, you are considered a self-employed individual in performing your ministerial services, you may be considered an employee for income tax or retirement plan purposes. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages. Depending on all the facts and circumstances, under common-law rules you are considered either an employee or a self employed-person. Generally, you are an employee if your employer has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Publication 15-A (PDF), Employer's Supplemental Tax Guide. If you are employed by a congregation for a salary, you are generally a common-law employee and income from the exercise of your ministry is considered wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income.
If you itemize your deductions, you may be able to deduct certain unreimbursed business expenses related to your services on Form 1040, Schedule A, Itemized Deductions. You may need to fill out Form 2106 (PDF), Employee Business Expenses, and attach it to your Form 1040 (PDF), U. S. Individual Income Tax Return. Refer to Topic 514 for information on Employee Business Expenses, and Topic 508 for information on the 2% of adjusted gross income limitation. For the offerings or fees you receive for performing marriages, baptisms, funerals, etc., use Form 1040, Schedule C (PDF), Profit or Loss From Business, or Form 1040, Schedule C-EZ (PDF), Net Profit From Business, to report these earnings and expenses. The gross income of a licensed, commissioned or ordained minister does not include the fair rental value of a home (a parsonage provided), or a housing allowance paid, as part of the minister's compensation for services performed that are ordinarily the duties of the minister. If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable salary, the fair rental value of the home, or your actual expenses, you must include the amount of the excess as other income.
A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister's services.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home. The amount excluded cannot be more than the reasonable pay for the minister's services.
The minister's employing organization must officially designate the allowance as a housing allowance before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable from income only for income tax purposes. No exclusion applies for self-employment tax purposes. For Social Security purposes, a duly ordained, licensed or commissioned minister is self-employed. This means that your salary on Form W–2, the net profit on Schedule C or C–EZ, and your housing allowance, less your employee business expenses are subject to self-employment tax on Form 1040, Schedule SE (PDF), Self-Employment Tax. However, you can request an exemption from self-employment tax, if you are conscientiously opposed to public insurance for religious reasons. You cannot request exemption solely for economic reasons. To request the exemption, file Form 4361 (PDF), Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, with the IRS. You must file it by the due date of your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $400.00. This rule applies if any part of your net earnings from each of the two years came from the performance of ministerial services. The two years do not have to be consecutive tax years.
For more information, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Even though, for social security tax purposes, you are considered a self-employed individual in performing your ministerial services, you may be considered an employee for income tax or retirement plan purposes. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages. Depending on all the facts and circumstances, under common-law rules you are considered either an employee or a self employed-person. Generally, you are an employee if your employer has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Publication 15-A (PDF), Employer's Supplemental Tax Guide. If you are employed by a congregation for a salary, you are generally a common-law employee and income from the exercise of your ministry is considered wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income.
If you itemize your deductions, you may be able to deduct certain unreimbursed business expenses related to your services on Form 1040, Schedule A, Itemized Deductions. You may need to fill out Form 2106 (PDF), Employee Business Expenses, and attach it to your Form 1040 (PDF), U. S. Individual Income Tax Return. Refer to Topic 514 for information on Employee Business Expenses, and Topic 508 for information on the 2% of adjusted gross income limitation. For the offerings or fees you receive for performing marriages, baptisms, funerals, etc., use Form 1040, Schedule C (PDF), Profit or Loss From Business, or Form 1040, Schedule C-EZ (PDF), Net Profit From Business, to report these earnings and expenses. The gross income of a licensed, commissioned or ordained minister does not include the fair rental value of a home (a parsonage provided), or a housing allowance paid, as part of the minister's compensation for services performed that are ordinarily the duties of the minister. If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable salary, the fair rental value of the home, or your actual expenses, you must include the amount of the excess as other income.
A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister's services.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home. The amount excluded cannot be more than the reasonable pay for the minister's services.
The minister's employing organization must officially designate the allowance as a housing allowance before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable from income only for income tax purposes. No exclusion applies for self-employment tax purposes. For Social Security purposes, a duly ordained, licensed or commissioned minister is self-employed. This means that your salary on Form W–2, the net profit on Schedule C or C–EZ, and your housing allowance, less your employee business expenses are subject to self-employment tax on Form 1040, Schedule SE (PDF), Self-Employment Tax. However, you can request an exemption from self-employment tax, if you are conscientiously opposed to public insurance for religious reasons. You cannot request exemption solely for economic reasons. To request the exemption, file Form 4361 (PDF), Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, with the IRS. You must file it by the due date of your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $400.00. This rule applies if any part of your net earnings from each of the two years came from the performance of ministerial services. The two years do not have to be consecutive tax years.
For more information, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Interest Received
Most interest received that can be withdrawn, is taxable income. Examples of taxable interest are interest on bank accounts, money market accuracy certificates, and deposited insurance dividends. Interest on insurance dividends left on deposit with the Department of Veterans Affairs, however, is not taxable. Interest on Series EE and Series I U.S. Savings Bonds generally does not have to be reported until redeemed or they mature. Interest from these bonds may be excluded from income if used to pay for qualified higher educational expenses during the year and other requirements are met. Refer to Publication 550, Investment Income and Expenses, for detailed information.
Certain distributions commonly referred to as dividends are actually interest. They include "dividends" on deposits or share accounts in cooperative banks, credit unions, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.
If a bond, note, or other debt instrument was originally issued at a discount, part of the original issue discount may have to be included in income each year as interest. Refer to Publication 550 or Publication 1212, List of Original Issue Discount Instruments, for more information on original issue discount.
Report the amount of any tax exempt interest received during the tax year. This is an information reporting requirement only, and does not convert tax exempt interest to taxable interest. Form 1099-INT (PDF), Interest Income, Form 1099-OID (PDF), Original Issue Discount, or a similar statement should be received from each payer of interest of $10 or more, showing the taxable interest to be reported.
If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Form 1040 Schedule B or Form 1040A Schedule 1. Follow the form instructions for nominees. You must prepare a Form 1099-INT (PDF) for the interest that is not yours and give Copy B to the actual owner. You must also file a copy and a completed Form 1096 (PDF), Annual Summary and Transmittal of U.S. Information Returns, with the Internal Revenue Service Center.
Excludable interest from redeemed U.S. savings bonds used to pay qualified higher education expenses is figured on Form 8815 (PDF) and shown on Form 1040 Schedule B or Form 1040A Schedule 1.
If you receive taxable interest, you may have to pay estimated tax. For more information on interest income, refer to Publication 550.
You must give the payer of your interest income your correct social security number. If you do not, you may be subject to a penalty and backup withholding. Refer to Topic 307 for information on backup withholding.
Certain distributions commonly referred to as dividends are actually interest. They include "dividends" on deposits or share accounts in cooperative banks, credit unions, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.
If a bond, note, or other debt instrument was originally issued at a discount, part of the original issue discount may have to be included in income each year as interest. Refer to Publication 550 or Publication 1212, List of Original Issue Discount Instruments, for more information on original issue discount.
Report the amount of any tax exempt interest received during the tax year. This is an information reporting requirement only, and does not convert tax exempt interest to taxable interest. Form 1099-INT (PDF), Interest Income, Form 1099-OID (PDF), Original Issue Discount, or a similar statement should be received from each payer of interest of $10 or more, showing the taxable interest to be reported.
If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Form 1040 Schedule B or Form 1040A Schedule 1. Follow the form instructions for nominees. You must prepare a Form 1099-INT (PDF) for the interest that is not yours and give Copy B to the actual owner. You must also file a copy and a completed Form 1096 (PDF), Annual Summary and Transmittal of U.S. Information Returns, with the Internal Revenue Service Center.
Excludable interest from redeemed U.S. savings bonds used to pay qualified higher education expenses is figured on Form 8815 (PDF) and shown on Form 1040 Schedule B or Form 1040A Schedule 1.
If you receive taxable interest, you may have to pay estimated tax. For more information on interest income, refer to Publication 550.
You must give the payer of your interest income your correct social security number. If you do not, you may be subject to a penalty and backup withholding. Refer to Topic 307 for information on backup withholding.
Wages and Salaries
Wages, salaries, and tips received by an employee for performing services for an employer must be included in your gross income. Amounts withheld for taxes, including but not limited to income tax, social security and Medicare taxes are considered "received" and must be included in gross income in the year they are withheld. Generally, your employer's contribution to a qualified pension plan for you is not included in gross income at the time it is contributed. However, amounts withheld under certain salary reduction agreements with your employer may have to be included in gross income in the year they are withheld. See Publication 17, Chapter 5, Wages Salaries and Other Earnings, and Chapter 6, Tip Income, for specific information.
Your employer should provide a Form W-2 (PDF) showing your total income and withholding. You must include all wages and withholding's from all Forms W-2 you receive, and if filing jointly all of your spouses Forms W-2. Attach a copy of each W–2 to the front of your tax return as indicated in the instructions. Please note that Form 1099-MISC (PDF) generally reports self-employment income. See Publication 334, Tax Guide For Small Business, for more information.
NOTE: Topic 407 provides information on Business Income.
File an amended tax return, Form 1040X (PDF), if you receive a Form W-2 after your return is filed. Topic 308 provides information on amended returns.
Refer to Topic 154, Forms W-2 and Form 1099–R (What To Do If Not Received), if you have not received one or more Forms W–2 by January 31st.
For more information on tips, refer to Publication 531, Reporting Tip Income. Publication 1244, which contains Form 4070A, Employee's Daily Record of Tips, and Form 4070, Employee's Report of Tips to Employer, should also be helpful to you.
Your employer should provide a Form W-2 (PDF) showing your total income and withholding. You must include all wages and withholding's from all Forms W-2 you receive, and if filing jointly all of your spouses Forms W-2. Attach a copy of each W–2 to the front of your tax return as indicated in the instructions. Please note that Form 1099-MISC (PDF) generally reports self-employment income. See Publication 334, Tax Guide For Small Business, for more information.
NOTE: Topic 407 provides information on Business Income.
File an amended tax return, Form 1040X (PDF), if you receive a Form W-2 after your return is filed. Topic 308 provides information on amended returns.
Refer to Topic 154, Forms W-2 and Form 1099–R (What To Do If Not Received), if you have not received one or more Forms W–2 by January 31st.
For more information on tips, refer to Publication 531, Reporting Tip Income. Publication 1244, which contains Form 4070A, Employee's Daily Record of Tips, and Form 4070, Employee's Report of Tips to Employer, should also be helpful to you.
Installment Sales
An installment sale is a sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs. You are required to report the sale under the installment method unless you "elect out" on or before the due date for filing your tax return (including extensions) for the year of the sale. If you elect out, you report all the gain as income in the year of the sale. Installment sale rules do not apply to losses. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market.
Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received (your gain is generally the amount by which the proceeds you receive or will receive from your sale, not counting interest, exceed your adjusted basis in the property you sold). Use Form 6252 (PDF), Installment Sale Income, to report installment income each year. You will need to file Form 1040 (PDF), and may need to attach Form 4797 (PDF) and Form 1040, Schedule D (PDF).
If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. You must report interest as ordinary income. Interest is generally not included in a down payment. However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Interest provided for in the agreement is called "stated" interest. If interest is not charged or the interest rate is too low, there is a minimum amount of interest you, as a seller, are considered to have received. This "imputed" or "unstated" interest or original issue discount is taxable. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletin. You can get this information by contacting the IRS at 800-829-1040 or on the IRS website at IRS.gov.
For additional information, refer to Publication 537, Installment Sales.
Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received (your gain is generally the amount by which the proceeds you receive or will receive from your sale, not counting interest, exceed your adjusted basis in the property you sold). Use Form 6252 (PDF), Installment Sale Income, to report installment income each year. You will need to file Form 1040 (PDF), and may need to attach Form 4797 (PDF) and Form 1040, Schedule D (PDF).
If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. You must report interest as ordinary income. Interest is generally not included in a down payment. However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Interest provided for in the agreement is called "stated" interest. If interest is not charged or the interest rate is too low, there is a minimum amount of interest you, as a seller, are considered to have received. This "imputed" or "unstated" interest or original issue discount is taxable. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletin. You can get this information by contacting the IRS at 800-829-1040 or on the IRS website at IRS.gov.
For additional information, refer to Publication 537, Installment Sales.
Basis of Assets
Basis is generally the amount of your investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.
The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase. Your basis in some assets cannot be determined by cost. If you acquire property other than through a purchase, refer to Publication 551, Basis of Assets, for more information.
If you buy stocks or bonds your basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have stocks or bonds that you did not purchase, your basis may be determined by their fair market value or the previous owner's adjusted basis. Refer to Publication 550, Investment Income and Expenses, for more information. For information on the basis of mutual fund shares, refer to Publication 564, Mutual Fund Distributions.
Before figuring gain or loss on a sale, exchange, or other disposition of property, or before figuring allowable depreciation, you must usually determine the adjusted basis of that property. Certain events that occur during your period of ownership may increase or decrease your basis, resulting in an "adjusted basis". Increase your basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as depreciation allowable and insurance reimbursements for casualty and theft losses.
The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase. Your basis in some assets cannot be determined by cost. If you acquire property other than through a purchase, refer to Publication 551, Basis of Assets, for more information.
If you buy stocks or bonds your basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have stocks or bonds that you did not purchase, your basis may be determined by their fair market value or the previous owner's adjusted basis. Refer to Publication 550, Investment Income and Expenses, for more information. For information on the basis of mutual fund shares, refer to Publication 564, Mutual Fund Distributions.
Before figuring gain or loss on a sale, exchange, or other disposition of property, or before figuring allowable depreciation, you must usually determine the adjusted basis of that property. Certain events that occur during your period of ownership may increase or decrease your basis, resulting in an "adjusted basis". Increase your basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as depreciation allowable and insurance reimbursements for casualty and theft losses.
Eight Important Questions for Hobbyists
Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.
If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
Here are eight questions that will help determine if your activity is a hobby or a business.
1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
2. Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
3. Do you depend on income from the activity? If so, your activity is likely considered a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
More information about not-for-profit activities is available in Publication 535.
If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
Here are eight questions that will help determine if your activity is a hobby or a business.
1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
2. Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
3. Do you depend on income from the activity? If so, your activity is likely considered a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
More information about not-for-profit activities is available in Publication 535.
Hobby Losses
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.
In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:
* Does the time and effort put into the activity indicate an intention to make a profit?
* Does the taxpayer depend on income from the activity?
* If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
* Has the taxpayer changed methods of operation to improve profitability?
* Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
* Has the taxpayer made a profit in similar activities in the past?
* Does the activity make a profit in some years?
* Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:
* Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
* Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
* Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:
* Does the time and effort put into the activity indicate an intention to make a profit?
* Does the taxpayer depend on income from the activity?
* If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
* Has the taxpayer changed methods of operation to improve profitability?
* Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
* Has the taxpayer made a profit in similar activities in the past?
* Does the activity make a profit in some years?
* Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:
* Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
* Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
* Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
Ten Things to Know About Farm Income and Deductions
If you have a farming business, there are several tax issues to consider before filing your federal tax return. The IRS has compiled a list of 10 things that farmers may want to know.
- Crop Insurance Proceeds —You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.
- Sales Caused by Weather — Related Condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone reporting the gain from selling the additional animals due to the weather until the next year.
- Farm Income Averaging — You may be able to average all or some of your current year’s farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.
- Deductible Farm Expenses — The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
- Employees and Hired Help — You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold social security, medicare and income taxes on employees.
- Items Purchased for Resale — You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.
- Net Operating Losses — If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
- Repayment of Loans — You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.
- Fuel and Road Use —You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.
- Farmer’s Tax Guide — More information about farm income and deductions is in IRS Publication 225, Farmer’s Tax Guide.