Finding yourself on the receiving end of some unexpected income can feel pretty good. After all, depending on how much you receive, you probably have a lot of things you want to do with these extra funds. But before you book a vacation or buy a new car, take some time to assess the situation. Oftentimes, unexpected windfalls are accompanied by unexpected financial responsibilities.
An Ohio woman, who received $55,000 on a popular talk show in 2013, recently learned this lesson the hard way. Even though she claimed the excess income on her 2013 tax returns, she was unable to pay the tax bill that followed. The City of Xenia pressed charges citing the woman “knowingly failed or refused to pay” income tax. A judge found her guilty and went on to impose a suspended 30-day jail sentence and monetary fine.
Soon thereafter, the woman appealed the conviction. Upon hearing her case, the Ohio Court of Appeals reversed the decision of the lower court. The decision was based on her claim that “her attorney rendered ineffective assistance.” On the matter of whether taxes were owed to the municipality, the Appellate court noted the taxpayer was likely in violation of Xenia’s income tax ordinance. The case, according to the court, was sent back to a lower court for further proceedings.
You can read the opinion of the court here.
Free Money Likely Has Strings Attached
In the case outlined above, the defendant went on to claim that the money she received was a gift. Yet, the company that dispersed the funds issued a Form 1099-Miscellaneous. On the form, the category that classified the funds as “nonemployee compensation” was selected. A judge has been given the job of deciding whether the money was a gift (which is nontaxable) or is nonemployee compensation (which is subject to tax).
In the meantime, this is a great opportunity to provide a clear understanding of what is and is not considered taxable income.
Examples Of Taxable, Nontaxable Income
The IRS says, “Taxable income is the gross income of an individual or corporation, less any allowable tax deduction.”
Therefore, your taxable income is far more inclusive than the amount indicated on your Form W-2. In other words, you are responsible for paying taxes on just about everything that can inflate your bank account. According to an article from the IRS, examples of taxable income include:
- Wages, salaries, tips, business income and unemployment compensation
- Pensions, annuities, 401(k) plans, retirement plan rollovers and Social Security
- Lump-sum distributions
- Capital gains and losses
- Income from rental property, farming or fishing
- Gambling income and losses
- Bartering income
- Scholarship and Fellowship grants
- Alimony and child support
- Canceled debt
- Interest received
While the income sources listed above may be subject to federal, state and local taxes, the same is not true for a handful of other types of income, including:
- Gifts and inheritances
- Life insurance proceeds
- Certain veteran’s benefits
- Insurance reimbursements for medical expenses not previously deducted
- Compensatory damages for personal physical injury or illness
- Workers’ compensation
- Some qualified pension distributions for Public Safety Officers.
Note: These lists are not an all-encompassing. Check out Publication 525, Taxable and Nontaxable Income for a comprehensive summary and explanation.
If you have questions about whether your income is taxable or if you are looking for risk management assistance, email Rea & Associates. A financial advisor can help you make financial sound choices while helping you meet your financial obligation. As you can see in the example above, the penalties for not meeting your financial responsibilities are very serious.
By Jordan Miller, CPA (Millersburg office)