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I Owe Tax on That?

HomeTag "Gambling tax deductions"
I Owe Tax on That?
March 14 2022 RgKAdmin14 Tax Tips, Tax Preparation 0 comments Tags: Social Security benefits taxes, alimony taxes, Gambling tax deductions, scholarship and financial aid taxes, gambling taxes, unemployment tax

5 Surprising Taxable Items

Wages and self-employment earnings are taxable, but what about the random cash or financial benefits you receive through other means? If something of value changes hands, you can bet the IRS considers a way to tax it. Here are five taxable items that might surprise you:

  1. Scholarships and financial aid. Applying for scholarships and financial aid are top priorities for parents of college-bound children. But be careful — if any part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, travel expenses or aid received in exchange for work (e.g., tutoring or research).

    Tip:
     When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to review state rules as well. While most scholarships and aid are tax-free, no one needs a tax surprise.
  1. Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records. For more detailed information about gambling and taxes check out last month’s blog: https://robertjkratz.com/court-is-in-session-notable-tax-court-cases/

    Tip:
     Know when the gambling establishment is required to report your winnings. It varies by type of betting. For instance, the filing threshold for winnings from fantasy sports betting and horse racing is $600, while slot machines and bingo are typically $1,200. But beware, the gambling facility and state requirements may lower the limit.
  1. Unemployment compensation. Congress gave taxpayers a one-year reprieve in 2020 from paying taxes on unemployment income. Unfortunately, this tax break did not get extended for the 2021 tax year. So unless Congress passes a law extending the 2020 tax break, unemployment will once again be taxable starting with your 2021 tax return.

    Tip:
     If you are collecting unemployment, you can either have taxes withheld and receive the net amount or make estimated payments to cover the tax liability.
  1. Social Security benefits. If your income is high enough after you retire, you could owe income taxes on up to 85% of the Social Security benefits you receive.

    Tip:
     Consider if delaying when you start collecting Social Security benefits makes sense for you. Waiting to start benefits means you’ll avoid paying taxes on your Social Security benefits for now, plus you’ll get a bigger payment each month you delay until you reach age 70.
  1. Alimony Deductable. Prior to 2019, alimony was generally deductible by the person making alimony payments, with the recipient generally required to report alimony payments received as taxable income. Now the situation is flipped: For divorce and separation agreements executed since December 31, 2018, alimony is no longer deductible by the payer, and alimony payments received are not reported as income.

    Tip:
     Alimony payments no longer need to be made in cash. Consider having the low-income earning spouse take more retirement assets such as 401(k)s and IRAs in exchange for reduced alimony payments. This arrangement would allow the higher-earning spouse to make alimony payments by transferring retirement funds without paying income taxes on it.

When in doubt, it’s a good idea to keep accurate records so your tax liability can be correctly calculated, and you don’t get stuck paying more than what’s required.

This blog provides summary information regarding the subject matter at the time of publishing. Please call our office at 610-296-2500 with any questions on how this information may impact your situation. This material may not be published, rewritten, or redistributed without permission, except as noted here. All rights reserved.

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Court Is In Session – Notable Tax Court Cases
February 16 2022 RgKAdmin14 Tax Tips 0 comments Tags: Gambling tax deductions, Business expenses, travel expenses, advertising tax deductions

Despite the COVID-19 pandemic, political unrest, and severe weather events, the Tax Court has continued to churn out decisions affecting individual and business taxpayers. Here’s a brief sampling of several cases that may be of particular interest.

Coming Up Aces. (Coleman, TC Memo 146, 10/22/20) Gamblers take note of this ruling. You can generally deduct gambling losses up to the amount of your winnings from gambling activities if you can provide proper documentation. Now the Tax Court has allowed one taxpayer to estimate his expenses absent proper documentation.

Facts: A compulsive gambler was able to show that he likely spent the money from a $150,000 personal injury settlement in local casinos. The gambler, however, didn’t have the usual records to substantiate his claims. The Court allowed an estimated deduction because it was clear he had incurred significant expenses. The gambler was able to net his $350,000 in gambling winnings with $350,000 in estimated gambling losses.

Tax Tip: Save documentation for all your tax deductions, including gambling winnings and losses. Don’t rely on a tax court ruling!

Home (Not) Sweet Home. (Soboyede, TC Summ. Op. 2021-3, 1/26/21) This can come as an unwanted surprise. Your tax home for deducting travel expenses isn’t necessarily the place where you live. It’s the general area of your primary workplace.

Facts: The taxpayer was an attorney with separate law practices in Minnesota and Washington, D.C. He deducted his hotel expenses and other travel costs in the D.C. area. But his records showed he actually spent more than 50% of his work time in or near the D.C. location. The Tax Court concluded that the attorney’s tax home is actually in D.C. As a result, he couldn’t deduct his hotel and other expenses from the D.C. area.

Tax Tip: You can deduct travel expenses only away from your tax home. If you work in multiple locations, be sure you know which location the IRS considers to be your tax home.

Skidding Off The Race Track. (Berry, TC Memo 2021-42, 4/7/21) The big question is is it ordinary and necessary? A business can deduct advertising and marketing expenses that are related to its business activities. No write-off is allowed, however, for personal expenses.

Facts: A father and son who owned a construction company were race car enthusiasts. They deducted expenses for the son’s racing activities that were incurred as an advertising and marketing expense of the construction company. The Tax Court disallowed the deduction, ruling the expenses were a hobby expenditure, not an ordinary and necessary business expense that can be deducted for tax purposes.

Tax Tip: Understand what is considered an ordinary and necessary business expense by the IRS and know whether your activity is deemed to be either a hobby or a for-profit business enterprise.

A Slight Understatement. (Pragrias, TC Memo 2021-82, 6/30/21) Under special circumstances, a tax audit can be conducted up to six years after being submitted. The IRS normally has three years from the due date of a tax return to conduct an audit of that return. This three-year period is extended to six years, however, if the tax return omits more than 25% of taxable income.

Facts: The taxpayer received $4.9 million from a complex investment but reported only about $1.5 million. The IRS audited the return after three years. Despite the taxpayer’s contention that he didn’t omit taxable income—he said he merely understated it—the Tax Court ruled that the longer six-year limit applies. And as a general rule, there is no statute of limitations for the IRS when fraud is involved.
 
Tax Tip: Understand the applicable statute of limitations with your tax returns.

This blog provides summary information regarding the subject matter at the time of publishing. Please call our office at 610-296-2500 with any questions on how this information may impact your situation. This material may not be published, rewritten, or redistributed without permission, except as noted here. All rights reserved.

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