5 Items You Should Pay Taxes On (But Aren’t)

The IRS expects you to pay taxes on all sorts of earnings, including these five things you might be overlooking.

When it comes to taxes, everyone knows you have to report your income from a full-time job or side gig. (Of course, not doing so is a common tax mistake.) But the IRS doesn’t stop there — they expect you to pay taxes on all sorts of earnings, including these five things you might be overlooking.

1. eBay Profits

If you sell the occasional item, such as a dress you no longer like or a collectible from your childhood, you likely don’t need to report your eBay income on your taxes. Because the items you auction off are probably selling for less than you originally bought them for, you’re taking a loss and the IRS views the transaction like a garage sale.

But if you sell items regularly — auctioning off 200 items and earning more than $20,000 in sales each year — your income is taxable. PayPal will issue you a 1099-K form with your earnings for the year in addition to reporting your income info to the IRS.

But even if you don’t meet those numbers, you may still have to pay taxes on eBay sales. If you deliberately buy items to resell on eBay or manage an inventory, the IRS considers your eBay store to be a business and will tax your profits as income.

2. GoFundMe Campaign

Crowdfunding sites like GoFundMe are increasingly popular, raising money to help people with everything from medical bills to paying off student loans. But when it comes to taxes, crowdfunding can be extremely complicated.

According to GoFundMe, donations made through the site are considered personal gifts and are usually not taxable as income.

But the key word is usually. There are exceptions. In 2015, a cancer survivor who received $50,000 in donations got a tax bill for more than $19,000. It gets even more complicated if you collect donations on behalf of someone else. Even if you transfer the money to them, you could be on the hook for paying taxes on the entire amount.

Before creating or cashing out a GoFundMe campaign, talk to a tax professional about what you can do to ensure the IRS views the donations as gifts rather than income. Otherwise, you could end up having to pay taxes.

3. Free Items

Items you receive free from companies can be a tricky area. If they’re true gifts, free things are not taxable. But when there is an exchange of goods and services — such as a company giving you a product in exchange for a review on the item — the IRS considers it bartering and the value of the sample is taxable as income.

This is an important distinction, especially for bloggers and social media influencers who often receive gifted items from companies. While the monetary income from your activity may be small, the value of samples can add up quickly. You may have to pay taxes for the full amount.

4. Forgiven Debt

If you have debt your lender forgave, the amount could be taxable as income. If you repay your federal student loans with an income-driven repayment plan, for instance, part of your balance may be forgiven if you meet the program’s requirements. That’s great news, but the discharged balance is taxable as income.

For example, say you were eligible to have $10,000 forgiven because you met the requirements of your income-based repayment plan. While you no longer have to make payments on your loan after it’s been forgiven, the IRS will tax you on the discharged amount of $10,000, and you will be sent a 1099-C Cancellation of Debt form. (Here’s what to know if you get one.)

Exceptions to this rule are loans discharged through Public Service Loan Forgiveness, Teacher Loan Forgiveness and debt eliminated through bankruptcy. In those scenarios, you do not have to pay taxes on the forgiven amount.

5. Fantasy Football

Fantasy football is a $3.6 billion industry, one in which the average player spends nine hours a week strategizing. It’s a fun activity that can consume players and take over office spaces. But whether you’re a serious participant or a casual player, fantasy football can have surprising tax implications.

The IRS requires individuals to report winnings from gambling, prizes and hobbies. If you win the office pool or an online league, your prize money is taxable as income.

If your winnings are more than $600, the league or host should send you and the IRS a 1099-MISC form. But even if your winnings are below that threshold and you don’t get a 1099, you still need to report that income on your taxes.

Keep in mind: You may be able to deduct some of the associated costs, too. If you won $1,000 but it cost $500 to enter, you can report only the net profit.

Find Out If You Need to Pay Taxes

When it comes to getting their share of your income, the IRS doesn’t play around. Besides the money you earn from your job, you may owe money for other overlooked activities. If you’re unsure about what to include in your tax return, talk to a tax professional to avoid any penalties or fees.

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Can I Pay My Taxes With a Credit Card?

Tax season is upon us, and many people are discovering they owe money to the Internal Revenue Service (IRS). (Still haven’t filed? You may want to read these 50 things to know if you haven’t done your taxes yet.)

This year, you have until April 18 to figure out how to pay taxes — April 15 falls on a Saturday, so taxes aren’t officially due until the following Tuesday. While there really isn’t a way to lower your tax bill at this point, although proper planning could lower it for next year, you may be wondering if you charge the bill to your credit card.

The short answer is yes, you can pay your taxes with a credit card. In fact, doing so may actually benefit you, if you’re using a rewards card. But there’s a lot to consider before doing you go this route.

Should You Use a Credit Card to Pay Your Taxes?

The answer here is maybe. If you have the means to pay your taxes in cash but are looking to earn some rewards, then a big tax bill is certainly a good opportunity to do that (assuming you pay the card off in full and don’t lose rewards to interest fees — more on that in a bit). But if you’re considering using your credit card to pay your taxes simply because you can’t afford them right now, the more prudent financial decision is very likely to talk to the IRS about a payment plan. Whatever you do, don’t avoid paying your taxes. It can have lasting ramifications for your finances, including your credit. You can see how your financial choices are affecting your credit by taking a look at your two free credit scores, updated every 14 days, on Credit.com.

Remember: There Are Fees

The IRS is contracted with three different companies to collect payments. These companies impose convenience fees that range from 1.87% to 2%. (You can read more about how to pay your taxes with a credit card here.) In order to profit by paying your taxes with a credit card, you have to earn more than the fees they are charging you.

There are a lot of rewards cards out there that offer 1.5% to 2% cash back on purchases.  But if you’re paying 1.87% and earning 2% you aren’t profiting much (on a $5,000 tax bill, you earn $6.50).

Paying With an Existing Card

If you don’t want a new card, or think you won’t qualify for a rewards card, it can still be advantageous to use your existing card can have advantages over paying your taxes through your bank account, even if it doesn’t have cash back. Credit cards give you a grace period from when you charge, to when you have to pay. Let’s suppose your card cycles on the eleventh of the month, so you pay your taxes on April 12. The next cycle ends on May 11 and your payment is due on June 11. That’s two extra months to hang onto your money and not incur any interest.

Considering a New Card Instead?

There are a lot of options out there, so you’ll want to think about which one would be most financially beneficial. Here’s an example: The Chase Sapphire Preferred card (read our review here) offers a 50,000 point signup bonus if you spend $4,000 in the first three months.

So, let’s suppose you have a $5,000 tax bill. After factoring in the fee, you spent $5,093.50, and you have 55,093 points available. If you cash out your points, you earn $550.93, a profit of $457.43. Not bad for a bill you were required to pay anyway. (It’s worth noting that this particular card does have a $95 annual fee, which is waived for the first year.)

If you plan to travel, then your rewards could be redeemed for a bit more. When you use your Chase rewards points to book airfare, hotels, car rentals or a handful of other travel expenses, you get a 25% bonus. So that $550.93 actually turns into $688.66 toward travel expenses booked through the Chase Ultimate Rewards portal. In other words, you’ve just paid for a plane ticket to just about anywhere in the U.S. (Have a Chase rewards card? Check out these three hacks for using the Chase Ultimate Rewards program.)

Can’t Pay the Card Off Right Away?

Now, if you can’t afford to pay off the balance of your tax bill right away, the above is moot. Here’s why: There’s no introductory 0% APR on balance transfers or new purchases with the Chase Sapphire Preferred, or many cards like it, so unless you can pay it off right away, you’re going to incur interest on that balance. This particular Chase card comes with a variable APR of 16.49% to 23.49% based on your creditworthiness, which would quickly offset any rewards you may earn.

If you can’t afford to pay your taxes right away, but you’re set on using your tax bill to net some nice rewards, there are some cards that offer a 0% APR on new purchases that can also give you some nice rewards, like the Discover it card.

The Discover it card (read our review here) comes with an introductory 0% APR on purchases and balance transfers for the first 14 months. After the introductory period is over the APR will change to a variable 11.49% to 23.49%. When you use the Discover it card to pay your taxes, you will receive 1% cash back. Additionally, Discover will match all cash back earned for the first 12 months. That means, sticking with the $5,000 tax bill, the overall cost would be $5,093.50. Including the cash back match, you would earn $100 in cash back, making your overall profit $6.50. While this isn’t a lot of money, you were also given up to 14 months to pay off your bill without accruing interest, which may be an even bigger reward for some people.

At publishing time, the Discover it card is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

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Donald Trump’s Latest Tax Problem Is More Common Than You Think

donald-trumps-latest-tax-problem

Donald Trump’s taxes have been a centerpiece of the election cycle — but the particular tax issues he’s faced have likely been beyond the pale for average Americans. Questions about releasing his returns, how much he’s donated to charity and whether his nine-figure losses should have offset his federal income tax responsibilities are not the kind of things most of us have to deal with as the April 15 tax deadline looms.

That changed a bit earlier this week, however, with a story in the New York Times that looked at how Trump was able to avoid reporting hundreds of millions of dollars in taxable income in the 1990s. It turns out the issues he may have been dealing with aren’t necessarily so different than those faced by millions of Americans — albeit on a much larger scale.

How Canceled Debt Affects Your Taxes

The issue revolves around canceled debt. When someone owes a bank some money, and they are no longer able to pay that money back, they may negotiate with the bank for a cancellation of all or a portion of that debt. This can happen in foreclosures, short sales and even when people owe money on their credit cards that they can’t afford to pay.

Let’s say, for example, you owe $25,000 on a credit card, but you simply can’t afford to pay it all back, and the interest and fees make it unlikely that you’ll ever be able to pay it back. You call up the bank and explain the situation and they agree to do a deal wherein you pay them $10,000 and they forgive the remaining $15,000. In addition to the credit consequences (that $15,000 in canceled debt will likely be documented on your credit report) there are tax consequences too. The IRS treats canceled debt like this as income, which means you’ll have to pay taxes on it, just as you would for your salary. People in this situation will often get a form called a 1099-C in the mail which documents this tax liability. Sometimes these forms come many years after the debt is forgiven. We’ve written about 1099-C problems extensively in the past and many people have no idea about potential tax liabilities when they are negotiating debt forgiveness with a financial institution. In fact, nearly 6 million Americans get 1099-Cs in the mail every year.

Trump’s Canceled Debts

So what does any of this have to do with Trump? A New York Times story by David Barstow, Mike McIntire, Patricia Cohen, Susanne Craig, and Russ Buettner published earlier this week looked at how the mogul allegedly dealt with his canceled debts in connection to overall losses in his casino business.

“As that empire floundered in the early 1990s, Mr. Trump pressured his financial backers to forgive hundreds of millions of dollars in debt he could not repay. While the cancellation of so much debt gave new life to Mr. Trump’s casinos, it created a potentially crippling problem with the Internal Revenue Service. In the eyes of the I.R.S., a dollar of canceled debt is the same as a dollar of taxable income. This meant Mr. Trump faced the painful prospect of having to report the hundreds of millions of dollars of canceled debt as if it were hundreds of millions of dollars of taxable income.”

So what did Trump do? According to the Times, he may have been able to offset those tax liabilities by using a stock-for-debt swap provision that existed in the tax code at the time. Here’s how the Times describes it:

“The strategy, known among tax practitioners as a “stock-for-debt swap,” relies on mathematical sleight of hand. Say a company can repay only $60 million of a $100 million bank loan. If the bank forgives the remaining $40 million, the company faces a large tax bill because it will have to report that canceled $40 million debt as taxable income.

Clever tax lawyers found a way around this inconvenience. The company would simply swap stock for the $40 million in debt it could not repay. This way, it would look as if the entire $100 million loan had been repaid, and presto: There would be no tax bill due for $40 million in canceled debt.

Best of all, it did not matter if the actual market value of the stock was considerably less than the $40 million in canceled debt. (Stock in an effectively insolvent company could easily be next to worthless.) Even in the opaque, rarefied world of gaming impenetrable tax regulations, this particular maneuver was about as close as a company could get to waving a magic wand and making taxes disappear.”

According to the Times, Trump allegedly stretched this strategy one step forward by swapping debt with partnership equity in his then-flailing casinos.  

Trump, who is no fan of the New York Times, declined to comment for the article. (His campaign also did not respond immediately to Credit.com’s request for comment.) Trump’s spokesperson, Holly Hicks, did send the Times this statement in an email: “Your email suggests either a fundamental misunderstanding or an intentional misreading of the law… Your thesis is a criticism, not just of Mr. Trump, but of all taxpayers who take the time and spend the money to try to comply with the dizzyingly complex and ambiguous tax laws without paying more tax than they owe. Mr. Trump does not think that taxpayers should file returns that resolve all doubt in favor of the I.R.S. And any tax experts that you have consulted are engaged in pure speculation. There is no news here.”

Socks-for-Debt-Swaps?

So how does all of this this relate to the average American who may have gotten a 1099-C in the mail and is facing a steep tax bill because of canceled debt? Well, given Congress banned stock-for-debt swaps in 1993 and equity-for-debt partnerships back in 2004 in order to eliminate the potential for abuse, no one will be able to replicate the strategy The Times alleged Trump to have used. Nevertheless, imagine if this option were available to everyday Americans. What might it look like?

Let’s go back to our earlier example: the $25,000 credit card debt. Let’s say the bank has agreed to forgive the whole thing, but you don’t want to get stuck paying income taxes on that $25,000. Since you’re an average American who doesn’t have stock to trade away and can’t do a “stock-for-debt swap,” let’s call this a “sock-for-debt swap.” You send the bank a cardboard box full of your old socks and tell them that they are worth $25,000. They bank doesn’t really care, because they’ve already forgiven the debt and written it off their books, but you get to tell the IRS that the bank hasn’t really “forgiven” anything. You traded that credit card debt for $25,000 worth of fabulous, beautiful, old socks. So you’re in the clear.

What to Do if You Get a 1099-C

The reality is most Americans can’t make much of an argument when they get a 1099-C in the mail. Still, there are a few steps you can take if you are really in dire straits and can’t afford to pay.  

Consumers might be able to avoid paying taxes on canceled debts by claiming the insolvency exclusion. Per the IRS, a taxpayer is insolvent when their total liabilities exceed his or her total assets. You may also be able to avoid paying if the debt was discharged in bankruptcy. You can go here to learn more about what to do if you get a 1099-C.

It also helps in these situations to pull a copy of your credit report. They can help you understand and confirm the dates and amounts listed on the form. You can pull your credit reports for free each year at AnnualCreditReport.com and view your free credit report summary, updated every 14 days, for free on Credit.com.

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Can I Pay My Taxes Late?

can-i-pay-my-taxes-late

Q. If I know I will owe taxes, is there an advantage to filing later? Or even doing an extension?
— Gonna owe

A. Let’s start with the rules that affect the timing of paying your taxes.

If the tax you owe is more than $1,000, the federal government will not allow you to pay your income taxes in one single payment — unless that payment was made in the first quarter of the year, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown, N.J.

“You must pay your taxes in through payroll withholding or quarterly estimated payments or a combination of the two,” Kiely said. “The amount you must pay in is the lesser of 100% of the prior’s year’s taxes or 90% of the current year’s taxes.”

If your adjusted gross income last year is $150,000 or more, you must pay in 110% of the prior year’s tax or 90% of this year’s tax, Kiely said.

These quarterly payments are due April 15 — the day your tax return is due — June 15, Sept. 15 and Jan. 15 of the next year.

Kiely said there is an exception to the four quarterly payments rule.

“Let’s assume you earn 100% of your annual income in a short period of time, say from Aug. 1 to Oct. 15,” he said. “That’s over two estimated tax quarters. You wouldn’t want to be required to make a payment in April or June — you had no income.”

Kiely said there Form 2210 is used to calculate underpayment penalties. Then there’s Form 2210 AI (Annualized Income), which would be used to show how much you earned each quarter and the resulting required payment. There is also form 2210 F, which is used for farmers.

“So if you owe more than $1,000, the interest and penalty clock is already running,” Kiely said. “Unless you meet one of the exceptions, the longer you wait to pay, the more you will owe.”

Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield, N.J., said you have the option of filing for an extension, and if you do so prior to April 15, you will not incur a late filing penalty as long as all your tax liability has been paid on a timely basis.

“However the extension only gives you extra time to actually file your return,” he said. “It does not give extra time to pay the taxes due.”

He said the interest rates assessed by the IRS are extremely high especially in light of the current low interest rates in the market. Interest rates on state taxes will vary by state, and you can check with your state’s tax authority to find out more details.

“There is absolutely no benefit to delaying the payment of your tax balance since neither the IRS nor the State of New Jersey want to be in the business of lending money, and therefore they purposely make it cost prohibitive to owe them money,” he said.

Good luck!

[Editor’s Note: Remember, a tax lien can hurt your credit score. You can see where your credit currently stands by viewing your two free credit scores each month on Credit.com.]

More on Income Tax:

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