5 Sources Of Income You Aren't Claiming - But Should
It's easy to prepare your income tax return from all of the tax forms you receive after the end of the year, such as W-2s, 1099s and donation receipts. However, there are taxable events that may occur during the year that represent income to you. Many taxpayers ignore them or simply don't know that they must include them. That can come back to haunt you if you are audited. Here are five sources of income that you should include on your taxes.
1. Barter Income
The basic rule is: if you perform a service or give goods to someone in exchange for something else of value and you do that for a living, the value of the goods or services received is taxable to you. For example, if you are a house builder and you make an arrangement with a neighbor to help him build his deck in exchange for having him prepare your tax return, the value of the tax preparation services must be included in your business income. If you agree to help your mother-in-law spring clean her house in exchange for looking after the kids after school for a few weeks, there are no tax implications as long as you are not a professional cleaner and your mother-in-law is not a child care provider. (Copying in numbers directly from your tax forms can end up with you paying more (or less) taxes than you owe see Don't Let Inaccurate Tax Forms Get You Audited!)
2. Merchandise Received for Hosting in-Home Sales Parties
Home-based sales parties are a popular way to sell many types of products, including kitchenware, candles and even lingerie. Each program is set up differently, but a common theme is that the sales representative has a friend host a party in her home and invite her other friends. The sales representative then comes over and demonstrates the products while the audience drinks wine and eats snacks. The hostess often receives free products based on how many sales are made during the evening. The value of the products received should be included in income as the hostess is "working" for those products. Any expenses incurred can be deducted based on regular business income rules.
3. Online Auction Sales
Online sites such as eBay (Nasdaq:EBAY) and Bid.com are thriving as they are a convenient way to clear out some of your unwanted household items. Many sellers look at these sites as online yard sales and, when used in this manner, they are. If you are selling an item that you have used personally, you do not need to claim it as income. In most cases, you would have paid more for the item than you sold it for, representing a net loss. However, if you buy goods to re-sell them on online sites, you are running a business and must include the income in your tax return. You can also deduct any legitimate business expenses against that income. Tax rules that begin in 2011 will require payment clearing facilities such as PayPal to report income activity on certain accounts so this type of income will become more difficult to conceal from the tax man in the future. (Why not switch it around, read Become The Tax Man.)
4. Content Writing Income
There are dozens of content sites on the web that allow people to upload original poetry, articles and other written, audio or video content. In some cases, there is an upfront payment for these and the writer usually receives ongoing small amounts of money based on either the page views or the advertising revenue the articles generate. These sites are not required to issue Form 1099-Misc. until the contributor has reached $600 in total payments for the year. However, you must claim this income even if it is below the threshold.
5. Salvaged Goods
If you come into possession of property that has been thrown away or abandoned and you therefore have not paid anything for it, technically, the value of the item must be included in your taxable income. This is more likely to be enforced in situations such as taking over ownership of abandoned land than it would be on a broken chair that you had to dumpster dive for. Although this tax rule may not come into play in your everyday life, keep it in mind if you find valuable items.
TUTORIAL: Personal Income Tax Guide
The Bottom Line
There are many types of taxable benefits that you may receive on a regular basis on which Uncle Sam wants to take his share. When you think that there may be tax consequences to a transaction you have engaged in, keep accurate records and review it with your accountant at year end or browse the IRS website to get more information.