But good money management and financial integrity are for the long haul.
You may benefit from disclosing concert and gaming income to the IRS. And it’s not just to avoid an audit or a prison sentence.
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Here are five reasons to report all of your taxable income to the IRS.
The IRS has a new way to catch tax evaders
In case you are still uncertain, all income must be reported on your tax return unless legally excluded. It’s the money you earn by cutting your hair or doing braids. It’s the money you get for picking up leaves or picking up groceries from people.
And yes, all gambling winnings must also be reported, says Eric Bronnenkant, tax manager at Betterment, a digital investment consultancy.
One way the IRS finds out your earnings are from third-party disclosures, such as a W-2 form from your employer or a 1099-K from a payment platform, such as PayPal, Venmo, or Cash App. The agency uses an automated system to compare this information with what people report on their tax returns.
As part of the $1.9 trillion stimulus package in 2021, Congress has significantly lowered the dollar threshold to trigger a Form 1099-K. In previous years, payment platforms were only required to issue them if a person has earned at least $20,000 and made at least 200 trades.
But from 2022, the reference has been reduced to $600 and there is no longer a transaction count requirement. This means that if you sell more than $600 worth of earrings on Etsy, you will receive a 1099-K in January.
Many people will be getting a 1099-K for the first time next year.
Here’s what to do if a payment app reports your cash donations to the IRS
If there is a discrepancy between your reported income and a 1099 received by the agency, you will likely receive a CP2000 notice of unreported income.
To be clear, as I noted in a recent column, cash gifts for weddings or birthdays are not taxable. So if you get a 1099 because of your marriage registry, that’s an error.
You could bet the IRS won’t catch everyone underreporting their income. But woe to the taxpayer who gets caught. The money you saved by circumventing the law could easily be eclipsed by hefty penalties and interest from the IRS.
The IRS is required by law to charge interest on any overdue taxes. The interest rate, set by law, is tied to interest rates on short-term Treasury securities and is expected to increase to 7% per annum, compounded daily, on January 1.
“Depending on interest rate trends, it could be higher or lower in the future,” IRS spokesman Eric Smith said.
Payment applications must notify the IRS of your stampede if you earn more than $600 a year
It can increase your social security benefits
It may take you years to collect Social Security, but underreporting your income could cost you dearly later in life.
Social Security uses your income and work history to determine your eligibility for retirement or disability benefits, or your family’s eligibility for survivor benefits when you die.
You must earn at least 40 Social Security credits to qualify for benefits. You earn credits when you work and pay social security contributions.
For 2022, you can accumulate one Social Security or Medicare credit for every $1,510 of covered earnings, with a maximum of four credits per year. You need to earn $6,040 to get the maximum number of credits, although the dollar the amount increases slightly as average incomes increase.
Additional credits do not increase your Social Security benefits.
However – and this is important – “the average of your earnings during your working years, and not the total number of credits you earn, determines the amount of your monthly payment when you receive benefits”, according to the Social Security Administration.
Asked in an April Gallup poll, 55% of retirees said they rely on Social Security as their main source of income.
You can find a way to not report all of your income – get paid in cash or ask customers to characterize a transaction as a personal payment on an app. Just know that not reporting it could result in a lower benefit when you retire.
“Make sure you’re getting the most Social Security benefits you can in retirement,” Bronnenkant said.
This may affect contributions to tax-advantaged retirement accounts
A freelance worker an individual can contribute up to 20% of company net income, or up to $61,000, to a simplified employee retirement IRA for 2022, Bronnenkant noted. SEP IRA contribution limits increase to $66,000 in 2023.
“The more earned income you have, the more you can contribute,” Bronnenkant said.
You can contribute a lot more to your 401(k) next year. Thanks inflation.
You could miss tax breaks
Several tax benefits are only available to people with earned income, including the Earned Income Tax Credit and the Child Care Credit (credit for child care and dependent care expenses ), Smith said.
My husband’s identity has been stolen. Then he got a fake 1099.
Your income is taken into account in the amount of your loan
Are you looking to buy a house?
In addition to looking at your credit history, lenders generally want to see at least a two-year history of tax returns to verify your income. If you have understated it, it could affect the loan amount and your ability to qualify for a favorable interest rate.
“Loan providers want to see copies of your tax returns, and if you understate your income, you’re hurting yourself because you’re not really showing all of your income,” Bronnenkant said.
Here’s a year-end tax tip from Bronnenkant: Don’t structure your life to avoid declaring all your income.
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