Got more than wage income? Here's how to report it.
Tuesday, February 21, 2023
Most U.S. workers get a salary or wages. Those amounts are reported to them early every year on Form W-2, which they use to file their annual tax return.
But a lot of those folks also get other money throughout the year, and the Internal Revenue Service wants to know about that, too.
These amounts, basically any income not reported on a W-2, go in Part I of Form 1040's Schedule 1, appropriately titled Additional Income.
In many, but not all, cases the additional earnings are reported on one of the many types of 1099 forms. As with W-2s, 1099s are copied to the IRS, so you want to be sure to include the amounts on your return.
Here's a look at where they go on Schedule 1, starting with lines 1 through 7, shown below.
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 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 your state tax department 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.
And this filing season, many taxpayers in 21 states who got state tax relief payments to help, in most cases, to offset inflation costs won't owe taxes on those refunds. Read more about the IRS decision to not tax this money in my post State relief payments issued in 2022 are federally tax free.
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. To make sure that you pay the appropriate tax due, and not more than you should, be sure you keep good records of your earnings, including amounts which weren't enough to trigger a 1099-NEC. The same advice applies to business expenses, such business miles driven and home office costs. All those amounts go on Schedule C.
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, 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 taxable 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. To cover these amounts, line 8 (shown below) has alphabetic sublines.
8a Net operating loss amounts — This happens when certain tax-deductible expenses exceed taxable revenues for a taxable year.
8b Gambling — When you bets pay off, Uncle Sam gets a portion. More on reporting them in my post about Super Bowl (and other) winning bets.
8c Cancelation of debt — In most instances, forgiven debt amounts are considered taxable income. Canceled debt typically shows up in box 2 of Form 1099-C.
8d Foreign earning income exclusion — This is where you enter the amount of your foreign earned income and housing exclusion from Form 2555, line 45.
8e Income from Form 8853 — If you have an Archer Medical Savings Account (MSA) and took distributions from it, enter that amount from the cited Form 8853 here.
8f Income from Form 8889 — If you received taxable distributions from a Health Savings Account (HSA), those amounts from Form 8889 go on this line.
8g Alaska Permanent Fund dividends — Residents of the Last Frontier get an annual payment from the state's Permanent Fund. This investment fund was constitutionally established in 1976 to manage the state's surplus oil and gas reserves revenues. That amount has always been federally taxable., and the amount is entered on this line.
8h Jury duty pay — Enter your jury duty pay if you gave the pay to your employer because your company paid your salary while you served on the jury.
8i Prizes and awards — Uncle Sam doesn't stop at your gambling proceeds. He wants part of your prizes and awards, unless you're a qualifying Olympic or Paralympic medal winner and recipient of U.S. Olympic & Paralympic Committee prize money. For some Olympians, this amount is now tax-free. Other Olympic games winners, however, need to check line 8m.
8j Activity not engaged in for profit income — This typically is a hobby, which doesn't meet the business description, but from which you do get some money. For example, you're a good amateur photographer, and your neighbors insist on paying you to take photos at their youngsters' birthday parties. That money is reported here.
8k Stock options — Enter here any income from the exercise of stock options that you didn't on line 1h of Form 1040.
8l 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 — Renting property and the various tax treatment gets complicated. For example, short-term rentals of personal residences might be tax free. But in other cases, the IRS gets a cut. Talk to a tax pro to ensure that any rental income that's not a business endeavor, say a one-off Airbnb rental when the Super Bowl was in your town, is reported on the proper tax form.
8m Olympic and Paralympic medals and USOC prize money (see instructions) — When the law was changed to exempt Olympics' rewards, it was based on the total earnings of the game participants. If your adjusted gross income is more than $1,000,000 (or $500,000 if married filing separately), then you still owe tax of your athletic payments.
8n Section 951(a) inclusion (see instructions) — As the line title says, the Form 1040 instructions for Schedule 1 has more. Also talk with a tax pro. This and line 8o involve U.S. shareholders of a controlled foreign corporation. Beyond my tax pay grade, and too must to include here effectively and concisely.
8o Section 951A(a) inclusion (see instructions) — See line 8n notes and add the tax acronym GILTI, which stands for global intangible low-taxed income. The form again recommends you check Form 1040 instructions for Schedule 1 for more guidance. Personally, though, the pronunciation of GILTI is more than enough to send me to a tax professional for guidance.
8p Section 461(l) excess business loss adjustment — Form 461, Limitation on Business Losses, instructions note that while the amount from line 16 of that form is a loss, you will report this excess business loss adjustment as a positive number on line 8p of 1040 Schedule 1. Not to be repetitive, but it's tax pro time again.
8q Taxable distributions from an ABLE account (see instructions)— Achieving a Better Life Experience, or ABLE, accounts were created in 2014 to help individuals with disabilities maintain their health, independence, and quality of life. Some ABLE distributions may be taxable. Again, as the line title says, the Form 1040 instructions for Schedule 1 has more on when those amounts need to be reported here. So does IRS Publication 907.
8r Scholarship and fellowship grants not reported on Form W-2 — As the line says, applicable educational funds go here.
8s Nontaxable amount of Medicaid waiver payments included on Form 1040, line 1a or 1d — Certain Medicaid waiver payments for caring for someone living with you in your home may be nontaxable. But if you choose to include nontaxable amounts in earned income for purposes of claiming a credit or other tax benefit, then on line 8s enter the total amount of the nontaxable payments as a negative number, i.e., in parentheses. IRS Publication 525 (or your tax pro) has more on Medicaid waiver payments.
8t Pension or annuity from a nonqualifed deferred compensation plan or a nongovernmental section 457 plan — If you got this money, it may be shown in box 11 of Form W-2.
8u Wages earned while incarcerated — If the one tiny silver lining of being in jail, either state or federal, is you made some money while behind bars, report the amount here.
8z Other income. List type and amount — This final catchall line for Schedule 1 is where you report any taxable income you didn't include elsewhere on your return or other schedules. List the type and amount of income. If necessary, the IRS says include a statement showing the required information. The Form 1040 instructions for Schedule 1 has the full list of the sometimes esoteric types of income that go here.
Adding it all up: You're almost done!
On line 9, you total all your line other income, the amounts listed on lines a through z.
Line 10 is the final total of lines 1 through 7 and line 9. Once you get the additional income amount, then also put that number on line 8 of your Form 1040, Form 1040-SR if you're an older filer, or Form 1040-NR for nonresident taxpayers.
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