Did you sell a few kilos of marijuana, take a bribe or steal a computer in 2009? Be sure to include that income on your tax return, unless you want to get in trouble with the Internal Revenue Service.
Virtually all Americans know they should report income such as wages, capital gains and tips -- even if those numbers sometimes don't make it onto their returns. But if you're an average taxpayer, you might not be familiar with some of the tax code's lesser-known income rules.
The basic rule is this: If it counts as income, it's taxable.
It doesn't matter where that income comes from. Prohibition-era gangster Al Capone contended, "The government can't collect legal taxes from illegal money," but he was wrong and wound up imprisoned for eight years for tax evasion. The tax laws are regularly used to nab other crooks the same way.
Maybe your year was better than a convicted drug dealer's. Did you win a Nobel prize or a beauty contest? You might have additional income to report.
For more information, here's what IRS rules say about other income:
Host or hostess. If you host a party at which sales are made, any gift you receive for giving the party is a payment for helping a direct seller make sales. You must report it as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are normally deductible as miscellaneous itemized deductions subject to the 2% of adjusted-gross-income limit on Schedule A (Form 1040, .pdf file), but only up to the amount of income you receive for giving the party.
For more information about the 50% limit for meal and entertainment expenses, see Publication 463: Travel, Entertainment, Gift, and Car Expenses.
Life insurance proceeds. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.
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Campaign contributions. These contributions are not income to a candidate unless they are diverted to his or her personal use. (Think $400 haircuts or $150,000 wardrobes.) To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest earned on bank deposits, dividends received on contributed securities and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations (.pdf file). Excess campaign funds transferred to an office account must be included in the officeholder's income on Form 1040, line 21, in the year transferred.
Cash rebates. A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.
Example: You buy a new car for $9,000 cash and receive a $400 rebate check from the manufacturer. The $400 is not income to you. Your basis in the car is $8,600. This is your basis on which you figure gain or loss if you sell the car, and depreciation if you use it for business.
Court awards and damages. To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. Include the following as ordinary income:
- Interest on any award.
- Compensation for lost wages or lost profits in most cases.
- Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
- Amounts received in settlement of pension rights (if you did not contribute to the plan).
- Damages for patent or copyright infringement, breach of contract or interference with business operations.
- Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
- Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).
Emotional distress. Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Do not include them in your income.
If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia and stomach disorders.
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Credit card insurance. Generally, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability or unemployment. Report on Form 1040, line 21, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year.
Down-payment assistance. If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance is not included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is not included in your basis.
Continued: Don't forget to report any kickbacks
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