That’s Taxable?
I must admit that it can be an uncomfortable conversation when a tax professional must explain that
something the client believes is not subject to income tax in fact is taxable. It’s more uncomfortable
though if that conversation happens because the client has an IRS notice. Better to have the conversation
at tax preparation time than a couple of years later with a notice in hand.
College can be expensive, and many students are able to offset some or all the cost of attendance with
scholarships. If your scholarship covers tuition, fees and books, then your scholarship is not subject to tax.
However, if your scholarship also covers room and board, travel and other college expenses, then that
portion is generally taxable.
Recently I reminded you that gambling losses can be used to offset gambling winnings, but the losses are
included as Itemized Deductions, so you won’t be able to deduct them if you don’t itemize. Gambling
winnings are always included in taxable income. If your winnings exceed certain thresholds (depending
on what you bet on), you will receive a W‐2G from the casino/payer. But even if you don’t receive a W‐
2G, you’re still required to report your gambling proceeds on your tax return.
Prizes and awards, such as a contest by your employer for a cruise awarded to the top salesperson, or a
winner on a game show, will be taxed on the fair market value of the winnings.
Bitcoin, and other virtual currencies, are a major topic of discussion in the tax community now. The IRS
considers these currencies to be assets like a stock, not cash, so anytime you use one of these currencies
to pay for a good or service, you will have a gain or loss to report. The IRS recently sent out over 10,000
letters to people who may not have reported virtual currency transactions. If you got one of these letters,
be sure to respond promptly. And don’t forget to report any virtual currency transactions going forward.
It should go without saying that any transaction where you are paid cash for goods or services should be
reported. Just because you’re paid cash for mowing a lawn or painting a room doesn’t exclude it from tax.
The same goes for bartering, or exchanging goods or services in lieu of cash. If you paint my room and I
mow your grass, we should each report the value of that service as income on our respective tax returns.
It can come as a shock if you have credit card or other debt and you’re able to negotiate a payoff at less
than the amount owed, but that “forgiven” debt is often taxable. Generally, if you have forgiven debt the
creditor will send you a Form 1099‐C showing the amount of cancelled debt. Not all cancelled debt is
taxable though. Certain student loans, debts discharged in bankruptcy, and a few others are not taxable.
Of course, these are just a few examples of items that are taxable that are often overlooked. If you have
questions about a particular item and whether it’s taxable or not, please call or email our office. Better
safe than sorry.
As always, I am looking for article ideas that you would like me to cover. If you have an idea for a future
article, or just have a topic you would like more information on, please send me an email.
