Happy Tuesday to everyone who skipped work yesterday. I hope you've fully recovered from your Super Bowl hangover.
I also hope that at least some of your prop bets on the NFL championship game also paid off. So does the Internal Revenue Service.
All your Super Bowl LIV winnings, as well as any other gambling proceeds are taxable income. Yes, even the winning bets placed illegally. Just look at what happened to Al Capone he didn't tell Uncle Sam's tax collector about his nefarious earnings.
And all your gambling proceeds, as well as all the other income you made last year, is detailed on the top half of Schedule 1 (pictured below), with the total amount transferred to your Form 1040.
Here's what you need to know on this Tax Form Tuesday about where on Schedule 1 to report your good luck and other types of income.
UPDATE: The 2020 tax year Schedule 1 no longer has the cryptocurrency question discussed below. That question now is on the revised Form 1040. The rest of the income reporting section remains the same for 2020 tax returns filed in 2021.
Accounting for cryptocurrency: Long-time readers of the ol' blog know that I'm pretty traditional when it comes to making money.
My personal personal-finance motto is, "Say it with cash." And while I do have some investments, they tend to stay within the usual asset parameters.
Other folks, however, are more adventurous when it comes to making money. The IRS knows this. That's why it added a new line to kick off its income collection data effort on Schedule 1.
The very firth thing the IRS asks on the recently-revised Schedule 1 is, "At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?"
Cryptocurrency for tax purposes is considered, for the most part, as a type of investment. The agency has been struggling for years on how to get a handle on how much virtual money folks hold. Last year, the IRS conducted a widespread outreach to — OK, correspondence audits of — owners of this asset.
This Schedule 1 virtual currency question is a logical next step in the IRS' efforts to gather additional info from taxpayers on crypto holdings. It's a not-so-subtle reminder that, regardless of whether you did or didn't get a letter about your virtual currency holdings, the IRS still has its literal eyes peeled for virtual money.
Various crypto transactions: If your cryptocurrency answer is yes, check the box here. That will alert the IRS to look for other reports from you of taxable bitcoin et al transactions.
The actions that could prompt a "yes" response include, according to the Form 1040 Schedule 1 instructions, with my comments in italics:
- The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork. I am not even going here or there as to what a hard fork is, since, as noted earlier, I am a cash devotee!
- An exchange of virtual currency for goods or services. In cases where an employer pays in cryptocurrency, that amount is subject to federal income tax and other withholdings, just like with regular dollar wages, and this all should show up on your W-2.
- A sale of virtual currency. Here is where the capital gains reporting and taxation comes into play. If you disposed of any virtual currency that was held as a capital asset, follow the usual reporting route to let the IRS know of your capital gains or losses. That's Form 8949 to figure your capital gain or loss and report it on Form 1040's Schedule D. (Spoiler alert: possible Tax Form Tuesday topics!)
- An exchange of virtual currency for other property, including for another virtual currency. See capital gains comments above.
If you did any of the above, check the "Yes" box.
However, if you didn't have any transactions involving virtual currency last year and you don't otherwise have to file Schedule 1, you don't have to do anything further.
But if you do have other non-cryptocurrency income, like your profitable bets, then check the "No" box and move on to Part 1 of Schedule 1.
Part I Additional Income 1: Now that you've 'fessed up about your bitcoin el al holdings, it's time to let the IRS know about your other earnings on in the first section of Schedule 1.
Additional income is, for the most part, money you got that wasn't covered by a W-2.
If comes not just as contract earnings reported on a 1099 form, but many other ways. Those are listed in this section's lines.
Taxable refunds, credits, or offsets of state and local income taxes (line 1)
Remember how thrilled you were when you got back a couple thousand as a state income tax refund? You might not be so happy now.
Generally, whenever you use some taxes to reduce other taxes, you could be liable for taxes on the refund of the taxes you claimed. Is that roundabout enough for you? Here's an example:
You itemized your federal tax deductions last year and claimed your state tax income tax payments. Any refund of those income taxes must be included as income on your federal tax return in the year you receive it, i.e., the year after you claimed it.
You also are likely to get a Form 1099-G from the payer reporting the tax refund amount just in case you have to claim it.
The IRS instructions for Form 1040 Schedule 1 provide more details on possible taxation of these state and local refunds and offsets. Tax software and, of course, your tax adviser also can help you determine what, if any, you might owe.
Also note that your refund is NOT taxed if, in the year you paid the tax, you either (a) didn't claim the income taxes as a federal itemized deduction or (b) chose to deduct state and local sales taxes instead of income taxes.
Alimony received (lines 2a and 2b)
The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony, both paid and received. But it did so based on the date of the legal marital split, specifically such a decree on or before Dec. 31, 2018.
That's why here the IRS asks you enter on line 2a the amount of alimony you received.
Then on line 2b the date of your original divorce or separation agreement.
Alimony isn't taxable if your divorce or separation agreement was entered into on Jan. 1, 2019 or later. If, however, you must count spousal support as in your income, let your ex who's making the payments know your Social Security number. Your former partner needs that for his or her reporting purposes, i.e., deducting the payments.
Business income or (loss) (line 3)
If you worked as a freelancer or contractor, either full-time or various gig jobs, you'll report that income here. The amount will come from what you enter on your Schedule C. (Spoiler alert redux: Look for a future closer look at this form for sole proprietors.)
Other gains or (losses). (line 4)
This is a specific "other" category. It applies to assets used in a trade or business and which you sold or exchanged. Details on this activity can be found in the instructions for Form 4797, which you'll need to file in conjunction with your 1040/Schedule 1.
Rental real estate, royalties, partnerships, S corporations, trusts, etc. (line 5)
If you made (or lost) money in connection with rental real estate, royalties, partnerships, S corporations, estates, trusts and residual interests in real estate mortgage investment conduits (REMICs), you'll put that amount here. The details of this income (or loss) will be entered on Schedule E, which you'll attach with your tax return filing.
Farm income or (loss). (line 6)
Are you a get-your-hands-dirty or gentleman/woman farmer? Either way, the IRS wants to know. Basically, the IRS considers you as being in the farming business if you cultivate, operate or manage a farm for profit, either as owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms, as well as plantations — really, IRS? Let me check my century calendar — ranches, ranges and orchards and groves.
You'll have to fill out and file Schedule F if you have farming income. That form's instructions has more details on your filing requirements. You also can get more on applicable taxes in IRS Publication 225, Farmer's Tax Guide.
Unemployment compensation (line 7)
It was really tough when you lost your job. Now that it's tax filing time, things aren't getting any better. That financial assistance you got to tide you over between jobs is taxable income.
You should receive a Form 1099-G that shows in box 1 the total unemployment compensation you received. That amount goes on this line.
Other income (line 8)
Ah, the wonderful "other" catch-all. Line 8 is where you report any taxable income that's not entered elsewhere on your tax return or other schedules.
This is where your gambling winnings go.
Also reportable here as other income are:
- Most prizes and awards, unless you're an Olympic or Paralympic medal winner and recipient of U.S. Olympic & Paralympic Committee prize money. Those amounts are now tax-free.
- Jury duty pay.
- Alaska Permanent Fund dividends.
- Reimbursements or other amounts received for items deducted in an earlier year, such as medical expenses, real estate taxes, general sales taxes, or home mortgage interest.
- Income from the rental of personal property if you engaged in the rental for profit, but were not in the business of renting such property.
- Income from an activity not engaged in for profit. We're talking money you made on your hobby here.
The Form 1040 instructions' section on Schedule 1 has the full list of the sometimes esoteric types of income that go on this line.
Also on this line, list the type of other income and amount. If you have several such entries here, put their total in the dollar amount block of this line. If necessary, include a statement showing the various earnings.
Totaling all your earnings: Line 9 is where you add up all the amounts from the previous 8 lines. This number also goes on line 7a of your Form 1040 or, if you're an older taxpayer, Form 1040-SR.
Reducing your gambling income: If you're a very successful and/or lucky bettor, I can't let you leave without noting that you can reduce your taxable gambling earnings.
Note, however, that your bad betting luck only goes so far. You can only use your gambling losses to offset, perhaps zero out, your winnings.
You cannot use them to produce an income loss on your return.
And if you don't itemize, which you might not especially now that the standard deductions are so much larger under the new tax law, then you can't reduce your gambling winnings at all.
You must simply report all the money you made on winning wagers on Schedule 1.
Deductions, too: As you've already noticed, this is just the first part of Schedule 1.
Part II of this TCJA addendum to Form 1040 covers a lot of deductions that don't need to be itemized. They were discussed in the Jan. 28 Tax Forms Tuesday post.