Gulf Oil Spill Claim Payments are Taxable

The IRS confirmed yesterday that payments for lost wages, profits, and business income resulting from the oil spill are indeed taxable. Hope all those who were affected by the spill saved some of those payments…

Nola.com reports:

The IRS said, it's important that people, if possible, budget for the tax liability on their payments from the claims fund.

Payments made in 2010 are payable from 2010 taxes, which are due April 18. Tax filings are normally due April 15, but because that is a Washington D.C. holiday -- Emancipation Day -- so everyone across the country is being given an extra three days for the tax filing deadline.

Payments from the Gulf Claim Fund made in 2011 would be paid on 2011 taxes, which are due in April 2012.

Dee Harris Stepter, spokeswoman for New Orleans IRS office, said the agency is encouraging people to check with their tax preparers in detail about the effect of compensation from the BP oil fund.

For those struggling with payment and collection issues, she suggested paying as much as possible by the April 18 deadline to minimize penalties and interest. For unpaid balances, Stepter said people can work out payment plans with IRS. People with questions can contact a Gulf oil spill tax assistance line: 1.866.562.5227.

Continue reading at Nola.com...

Are BP payments taxable income?

Many people on the Gulf Coast affected by the oil spill are filing claims through the BP oil company and they want to know, “Will the BP payments be taxable income?” This great question came up on the Don’tMessWithTaxes blog, and the answer to the question is: Yes, the payments will probably be taxable, but you never know, maybe not. Basically, the BP payments are considered payments made to individuals in the form of compensation for lost wages that would have otherwise been taxable income. Therefore, taxable. But sometimes people will get special tax treatment if they’ve been affected by disasters. Remember my blog about tax relief to flood victims?

Kenneth Feinberg, head of the Independent Claims Facility, said last week that it hasn't been determined if the payouts will be considered taxable income. Remember, this isn’t a gift from BP, it’s been given to cover money lost for jobs that couldn’t be done. The Treasury would lose a lot of revenue from these checks.

The recommendation is always set aside money for the IRS until you are certain it will not be taxable, just to be safe.

Tax Advice for Students Working a Summer Job

The school year is nearing an end for student all across the country and whether it is summer school or an entry level career job, millions of new employees will begin to enter the work force. If you are a working student yourself, or a parent of a child looking to get their first summer job, you might be concerned about the tax implications of being an employee. I have put together the following list of tax tips—let’s call it taxes 101 for wage earners—specifically for students working a summer job.

You will Need to Complete a W-4 Form

Whenever you start a new job you required to complete an IRS Form W-4, which essentially tells your employer the amount of tax to withhold from your paycheck. If you are not sure about what filing status you should claim or the number of exemptions to take, check out the withholding calculator on IRS.gov. At the start of a new job, you will also need to provide a government issued form of identification such as a driver’s license and proof of your social security number.

Tips and Odd Jobs are Taxable Income

If you work as a waiter, or any other position where you receive tips, you will need to report this money on your tax return. According to the IRS, all income from tips is subject to the federal income tax. Additionally, earnings from odd jobs such as house sitting, baby sitting, or mowing your neighbor’s lawn, are also subject to federal taxes.

Wages Paid Under the Table

Some employers will offer to pay students’ wages under the table – meaning they will not report the income to the IRS or withhold any taxes. However, it is your legal responsibility to claim this income on your federal tax return, regardless of whether or not the employer sends you a W-2 Form.

$400 or More Rule

If you earn $400 or more from any form of self-employment then you will have to pay self-employment tax on the income. This tax goes to Social Security and Medicare, which are usually taxes that are withheld from a wage earners paycheck. You will need to include your income, and calculate your self-employment tax on Schedule SE of your next IRS Form 1040.

Special Tax Laws for Newspaper Deliverers

There are a handful of special rules that apply to newspaper carriers or distributors. Technically, the IRS will treat you like a self-employed taxpayer as long as you meet the following conditions:

• You are in the business of distributing newspapers
• The pay you receive is related to your sales as opposed to the number of hours worked
• The distribution services are performed under a written agreement stating that you are not to be treated as a wage-earning employee in regards to federal taxes.

On a related note, children under the age of 18 working in the newspaper delivery business are not usually subject to the federal self-employment tax.

Questions for the Tax Lady: December 21st, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I have a small business with a few employees. If I throw a holiday party for them can I write off the expenses?

Yes, the IRS will let you deduct all expenses related to throwing a holiday office party. You could also deduct the costs of presents for your employees, as long as you do not give out cash or items easily exchangeable for cash, such as stocks.

Question # 2: What are some last minute ways to lower my taxable income for the year?

There are lots of quick ways you can lower your taxable income without leaving your computer. First of all, you could make a charitable donation. The Hannah Rose Foundation, a cause near to my heart, accepts donations online. Just remember to print out your receipt. You could also make an extra mortgage payment, or order energy efficient appliances online. For a list of 10 ways to lower your tax liability in under 10 minutes, check out this article on the RDTC Tax Help Blog.

Questions for the Tax Lady: December 14th, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: My husband and I are purchasing a new home. We already own another property, so will we be eligible for the new $6,500 credit if we close before the end of the year?

Yes. The Homeownership and Business Assistance Act of 2009 was signed into law on November 6^th, 2009, and became effective immediately. As long as you and your husband have been living in your principal residence for five years you should qualify for the credit. However, keep in mind that the credit does begin to phase out for couples making $245,000 or more per year.

Question #2: My business had a really profitable month. Do you have any ideas on last minute expenses to help lower my taxable income?

Depending on how many purchases you want to make, you could consider office furniture or computer equipment. Alternatively if you are looking for something cheaper, you could pay your January office rent early, or any other major bills such as your telephone service fee. On the other hand, you could defer some of your income until next year by waiting until after the end of the month to cash a check or two.

Questions for the Tax Lady: October 26th, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Are alimony payments taxable income?

Answer: Yes, alimony payments are subject to an income tax in the year received. You will need to report this income on IRS Form 1040 when you file your return this April. For more information on alimony, child support, court awards, and damages check out this page on IRS.gov.

Question #2: If my husband and I foreclose on our home, and the bank forgives us of the negative equity, will we have to claim that as taxable income?

No, fortunately you will not. Although canceled credit card debt is considered taxable income, this is not the case with mortgage related debt. Your lender should be familiar with this exclusion, but do not freak out if you do get a 1099 Form from them in January. Just file IRS Form 982 with your tax return, and you will not need to claim the canceled mortgage dept as income.

Questions for the Tax Lady: September 7th, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I recently received a settlement through mitigation. Is this money is going to be considered taxable income.

Yes, it will most likely be taxable income. The only settlements that you do not need to claim as income are those resulting from a physical injury. Therefore, any awards for discrimination, emotional distress, etc., should be considered income. Likewise, if you receive any settlement from a contractual dispute then it will also need to be reported on your income tax return.

I highly recommend speaking with a tax professional if you recently received a settlement and are confused about how to report it to the IRS.

Question #2: I need to get a copy of my tax return from last year for a home loan, but I cannot find it anywhere. Is it possible to get a copy from the IRS?

Yes. If you need to get a photocopy, or computer transcript, of your last tax return you can get it from the IRS for free. Just call 800-829-1040 or file Form 4506-T (Request for Transcript of Tax Return) with the IRS. Additionally, if you need an actual copy of a processed return then you will need to file IRS Form 4506 (Request for Copy of Tax Form) and pay a $57 fee.

Taxing Illegal Income

Every so often, I hear someone complain that as much as taxes take out of their income, they would be better off being a criminal. At least then they could keep whatever they earn, right? Well you might not want to quit your day job.

Over the last several years, I have heard increasing reports of the government charging criminals with tax evasion. Ridiculous though it sounds, according to the Internal Revenue Code, income derived from any source, including illegally earned income, is subject to income tax. And often the IRS only becomes aware of the illegal income after an arrest is made.

It is rather strange to think of a criminal diligently reporting the proceeds of their illegal activities, but this is what the IRS requires.

Most people know that infamous mobster, Al Capone, was arrested and imprisoned for tax evasion. You might assume this was an extreme case, and the government just needed a way to take out kingpin. However, charging those arrested and or convicted of crimes with tax evasion is gaining in popularity.

Specifically targeted are:

• Telemarketing Fraud
• Financial Institution Fraud
• Insurance Fraud
• Organized Crime
• Illegal Gaming

Why the emphasis on pursuing illegal income taxes? Well, the IRS is in serious need of funds, and illegal activities produce a lot of cash flow. The IRS states “Tax cases involving legally earned income are and continue to be a priority for IRS Criminal Investigation, followed by money laundering and illegal source income cases.”

You see? No one escapes the federal tax system.

Roni Deutch’s Law Firm Identifies Overlooked Forms of Taxable Income

My law firm’s blog, the Tax Relief Blog, the Official Blog of Roni Lynn Deutch, A Professional Tax Corporation, recently put together a list of commonly overlooked forms of taxable income. These are sources of income that we find taxpayers repeatedly fail to claim when filing their tax returns. This results in audits and back tax liabilities. Below, please find a sample from the entry, otherwise click the link above to read the entire entry:

1. Social Security Income

Social Security benefits may be non-taxable, or partially taxable. It depends on your total income from other sources. If your sole source of income during the tax year was Social Security, your benefits are probably not taxable. But, if you have other forms of income, including tax-exempt income, it could make your Social Security benefits taxable. If you add half the amount of your Social Security Benefits to all other forms of income, and the total exceeds a “base” amount, then a portion of your benefits will be taxable. In 2008, the base amount is $25,000 if single, married filing single, or head of household, and $32,000 if married filing jointly.

2. Unemployment Compensation

People are always surprised that unemployment compensation is taxable income. This includes any amounts you received under federal or state unemployment compensation laws, state unemployment insurance paid by a state (or District of Columbia) from the Federal Unemployment Trust Fund. If you received unemployment compensation during the year, you should receive IRS Form 1099-G, showing the amount you were paid, and if any taxes were already withheld. If your unemployment benefit payments were made from a private, non-union fund to which you voluntarily contribute are only taxable if you received more money than you put into the fund.

Please note that as a result of passing the American Recovery and Reinvestment Act (ARRA), starting in 2009, the first $2,400 earned in unemployment compensation is excludable as taxable income.

3. Gambling Winnings

Gambling winnings are fully taxable and must be reported on your tax return. Gambling winnings include any winnings from lotteries, raffles, horse races, or casinos. Both cash winnings and the fair market value of prizes such as cars and trips are counted as taxable income. If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must also include it in your income. A payer (such as the casino or track, etc.) is required to issue you an IRS Form W-2G if you receive certain gambling winnings or if your gambling winnings are subject to Federal income tax withholding. All gambling winnings must be reported no matter if any portion is subject to withholding or not.

Please note that you may deduct gambling losses only if you itemize deductions. You may claim your gambling losses as a miscellaneous deduction, however, the amount of losses you deduct may not be more than the amount of gambling income you have reported on your return.