December 9, 2020 10:26 pm

Did You Know It’s Taxable? Items Not to Overlook

The deadline for filing your 2020 federal income tax return is April 15, 2021, but it’s not too soon to recognize what payments you received in 2020 that have to be included in gross income. As a general rule, all income received is includible in gross income unless there is a specific exclusion, exemption, or other limitation. Due to COVID-19, there have been some new payments that have been received by some individuals. Some are tax free, while others must be included in gross income. Don’t be surprised to learn that the following types of payments are taxable.

1.     Refund interest

If you took advantage of the filing extension to July 15, 2020, for your 2019 Form 1040 or 1040-SR and were owed a refund, you automatically received interest from the federal government on the refund. This interest is taxable. Interest of $10 or more is reported to you on Form 1099-INT. Interest that is not tax exempt (e.g., interest on municipal bonds), no matter how small, is includible in gross income.

2.     Unemployment benefits

Payments from your state for unemployment benefits are taxable. This includes the additional unemployment benefits of $600 per week that were paid through the end of July. There is no exclusion for these benefits.

 3.     Qualified coronavirus distributions

If you took a distribution up to $100,00 from a qualified retirement plan or IRA because you were impacted by COVID-19, you must include the distribution in gross income. The CARES Act provided an exemption from the 10% early distribution penalty for those under age 59½, but it did not provide tax-free treatment for the distribution.  However, a qualifying distribution is generally included in income in equal amounts over 3 years (2020, 2021, and 2022), unless you elect to include the entire amount as 2020 income. The distribution will be reported to you on Form 1099-R. You must report the distribution on Form 8915-E.

You can repay the distribution within three years. This allows you to continue to build up retirement savings and you’ll be able to recoup the taxes paid on the distribution.

4.     Gig economy receipts

Perhaps you’ve been working in the gig economy all along, or maybe COVID-19 forced you into it. You’re a freelancer, a ride sharing driver, are delivering groceries or restaurant food, or engaged in some other self-employed activity. Gig Economy Data Hub reports (https://www.gigeconomydata.org/basics/how-many-gig-workers-are-there#more-than-one-in-ten-workers-rely-on-gig-work-for-their-primary-income) that one in 10 workers rely on gig work as their primary income, while about 25% of all workers participate in the gig economy. The income you earn, including tips, is taxable. It is also subject to self-employment tax.

If you received $600 or more from a business, you’ll receive Form 1099-NEC listing the payment. This form replaces the former box 7 of Form 1099-MISC. Alternatively, you may receive a Form 1099-K if you received payments through credit cards or electronic payments. While the IRS does not require it to be issued to workers who receive less than $20,000 annually and don’t have at least 200 transactions, some states are requiring gig platform companies to report to them payments to gig workers on this form. The IRS has a Gig Economy Tax Center (https://www.irs.gov/businesses/gig-economy-tax-center) explaining the tax rules for workers in the gig economy.

5.     Virtual currency transactions

If you sold any virtual currency or received payment for goods or services in virtual currency, the transaction(s) must be reported like any other property transaction. This includes payments you may have received for microtasks for online platforms. Microtasks include processing data, reviewing images, downloading an app and leaving a review, taking surveys, or performing any other online service for which there’s a “reward” or other payment.

Note: Form 1040 and 1040-SR have a question on page 1, beneath your name and address, asking: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Conclusion

Whether or not income is reported to you on an information return, such as Form W-2 or a 1099, it is includible in gross income unless there’s a special rule allowing you to partially or fully exclude it. Be sure you can distinguish between taxable and tax-free payments so you prepare for your tax bill through sufficient income tax withholding and estimated tax payments.

Sources:  https://givingusa.org/giving-usa-2020-charitable-giving-showed-solid-growth-climbing-to-449-64-billion-in-2019-one-of-the-highest-years-for-giving-on-record/
Resources: CCM 202035011; https://www.cpapracticeadvisor.com/payroll/news/21162017/gig-economy-beware-state-policies-require-more-1099-workers-to-report-earnings