It’s tax time, and many taxpayers either do their own taxes or consult a professional. Both types of taxpayers make the same fundamental mistake. They decide that they don’t have to report something because it’s “not taxable.” Even though it may not be taxable, it may still need to be reported on the tax return. Even though there are many items that this applies to, three of the most misunderstood will be discussed in this article.
Let’s start with the main culprit; Income. Many taxpayers think if income is less than a certain amount or for a particular purpose, it doesn’t have to be reported. That’s probably more false than it is true. Most income is reportable regardless if a 1099 is received from the payer. Examples include income received for babysitting, landscaping, snow removal, cutting hair, styling hair, taxpayers that rent rooms in your home (yes Airbnb counts too) lottery winnings, etc. Now this is not to be confused with gifts, but for any service provided it is generally reportable. Most taxpayers realize that they don’t have to file a tax return if they don’t earn more than $10,300. This number is derived from the standard deduction of $6,300 for 2015 for a single person plus their $4,000 exemption. Different filing statuses have different standard deductions but this provides a ballpark number to work with. The only problem with this math is that it applies to wage income. It does not apply to the self-employed income that was listed above. The threshold for self- employment income is actually $400. This is because self-employment income is subject to Social Security and Medicare tax which an employer would generally withhold for a wage earner. In this case, the self-employed person is actually responsible for paying the employee and employer portion of self-employment (Social Security and Medicare) tax. This requires them to file a tax return and report the income to pay the required taxes. Click here for more information on this.
Another item many taxpayers forget about reporting are distributions from retirement accounts or IRA’s. Generally these 1099 series forms are not issued until the end of January or early February so many early filers get these after they filed their return. Amended returns should be done to report the income. Are they taxable? It depends. There are some exceptions to withdrawals from IRA and 401k accounts; however, the exception must be reported on the tax return. The IRS receives a form indicating a retirement account distribution was made. They are prepared to tax and possibly penalize a taxpayer under the age of 59 ½ at the time of the distribution. The income and the exception must be reported to avoid any possible tax or penalty. It’s important to note that the income may be taxed but not subject to penalty. These are two different things. The exception may just avoid the penalty, not the tax.
Lastly, and surely not the least, health insurance is now mandatory due to the Affordable Care Act (ACA). Taxpayers must report whether or not they had health insurance on their tax return. Employers and Insurance companies are required to issue 1095 series forms to indicate the amount of coverage one received throughout the year. If someone did not have coverage but meets an exemption, they must apply for the exemption and report the exemption code on their return. If this is not done, they will face penalties on their tax return that will reduce any refunds owed.
To recap, is income reportable? Unless an exception applies, YES. Are retirement distributions reportable? YES, and the exception must be reported to help offset or avoid tax and or penalties that apply. Is healthcare reportable? YES, and if there was no coverage, and exception must be reported to avoid penalties for not having coverage. In short, report it, but taxes and or penalties may not be assessed if an exception applies.