Is This Taxable Income?
The holiday decorations are packed away, winter break is over, and soon we’ll be gathering 2023 tax documents in preparation for the April 15th filing deadline (or October 15th, if filing an extension). One topic sure to come up is the question of which income is taxable—a matter that surprises many households.
According to Section 61(a) of the Internal Revenue Code, gross income means “all income from whatever source derived, including (but not limited to) the following items: compensation for services, including fees, commissions, fringe benefits, and similar items, income derived from business, gains derived from dealings in property, interest, rents, royalties, dividends, annuities, income from life insurance and endowment contracts, pensions, income from discharge of indebtedness, distributive share of partnership gross income, income in respect of a decedent; and income from an interest in an estate or trust.”
Beyond what is outlined in an IRS publication, most working adults know that W-2 wages, 1099 income from interest, dividends, investment income, and capital gains are taxable in some capacity. However, there are other sources of revenue that households may not immediately associate with taxable income. For instance, if you helped a neighbor shovel snow and the neighbor paid you $100 as a courtesy, you’ve just earned taxable income.
Here are three common questions financial professionals receive about reporting income as taxable:
What if I didn’t receive a Form 1099?
The IRS Form 1099 (and there are multiple versions to cover various situations) reports non-employment income to the IRS. Businesses must issue a 1099-NEC (nonemployee compensation) to a taxpayer (excluding corporations that don’t provide legal services) who received at least $600 or more in non-employment compensation during the tax year. Even if you didn’t receive a 1099, you’re still responsible for reporting earnings as income. For example, if your savings account generated $75 of interest, you must report it, even if you did not receive a 1099-INT from the bank.
What if I made money from a cash sale?
Many believe that cash transactions are not traceable or reportable, but that’s a misconception. The IRS introduced the 1099-K form to ensure individuals and businesses report income, including cash transactions. The threshold for issuing a 1099-K is being lowered to $5,000 for 2024, highlighting the IRS’s focus on underreported income, particularly from cash sales.
What if I benefited from crowdfunding?
You’ve most likely seen the GoFundMe pages for someone raising money for a medical bill, or a Donorbox page created to help a family adopt a pet. If you receive funds from such a platform, those funds are usually considered a gift and not taxable. There are two exceptions, however: 1) Donors cannot receive something of value for their contribution, and 2) If an employer contributes to an employee’s cause, it must include the contribution in their gross income.
If you donate to a crowdfund, you may be able to claim a deduction on your tax return if the crowdfund is for a verified 501(c)(3) nonprofit. If you donated an amount greater than $17,000 during 2023 for the benefit of a person, you may need to file a federal gift tax return. Also, if your crowdfunding campaign raised more than $20,000 from more than 200 donations during 2023, donors could receive a 1099-K form from the crowdfunding platform. Taxable income and donations to crowdfunding sources can be complicated, so you may want to consult a tax professional before getting involved.
Since every household is likely to have some form of taxable income, be proactive in understanding what counts and what doesn’t. As always, Team Savant is here to help. Happy New Year!