There’s no such thing as a good time to start thinking about taxes. But with six weeks to this year’s filing deadline, some Answer Desk readers are slogging through their returns. Michael in Maryland is wrestling with the knotty question: do I really have to report everything to the IRS – like the money I make by selling my old stuff on eBay?
I have a very simple question but one in which no one seems to have an answer. I made $2,600 profit on eBay selling old items last year. Do I need to report that income on my tax return? … Ebay does not send out 1099's, so I ask: how would the federal government know what I made selling items on Ebay? They would not. The other point some people have mentioned was it a business or a hobby selling items on Ebay? For me it was a hobby. I did not buy and resell items at a higher price. My tax accountant advised me not to report the extra income. I am interested to hear your thoughts on the issue and what the IRS thinks?
Michael, Randallstown, MD
It is against the law not to report all income to the IRS.
It’s also true that billions of dollars in income go unreported every year. The exact amount, for obvious reasons, is tough to pin down. Much of this unreported income doesn't hit the IRS radar because it comes from sources that don't independently report it -- like wages paid by employers or dividend and interest income paid by banks and investment firms.
To help you stay on the right side of the law, the IRS has come up with all sorts of ways to report this miscellaneous income. If you want to call your eBay venture a hobby, for example, you can only do this as long as you're not pursuing the hobby with the intention of making money. (One test requires that you make no profit from your hobby in two of five consecutive years.) If you do report this as hobby income, you can deduct hobby expenses from your that income. But you can’t use hobby losses to offset other, non-hobby income.
If you call selling stuff on eBay a business, different rules apply, but you can still deduct expenses from your business income. You may not want to go through the paperwork to call it a business, though, if you don't expect to have a lot of profit or expense from future eBay-ing.
The simplest way to report this would be as a gain on the sale of property – provided you had a gain. If the total amount you received for the item is equal to or less than the total cost of buying and selling it, then you had no income. When you calculate a gain on the sale of any property, don’t forget to include all of the expenses associated with the sale when you figure what’s called the ”cost basis.”
For example, say decided to unload that Meet the Beatles LP you found at a tag sale for $5 and sold it for $30. For tax purposes, your cost basis could include the cost of listing it, the gas you put in your tank to get to the tag sale, and any other direct expenses associated with the transaction.
To offset the remaining gain, you could always dig out your sister's old Suzanne Sommers Thighmaster (originally $29.99, 30-day free trial), sell it for $5, and book a $25 loss. And any remaining loss could be applied to the $700 you got for the vintage 1962 Rocky and Bullwinkle lunchbox you found in your parents attic.
Just make sure you keep good records in case the IRS ever asks.
Is there anything I can due to avoid paying capital gains tax on a property I sold? …My accountant tells me I owe the IRS over $20,000. The property was sold on December 1st, 2005. Any advice on stretching out the payments to still earn interest - even if I have the money to pay in full?
Steve, Wilkes-Barre, Pa.
Unfortunately, with the national debt north of $8 trillion and the federal budget adding another $420 billion to that pile this year, the IRS wants its money now.
If you come up short when it comes time to pay your taxes, you can call up the folks at the IRS and try to negotiate a payment plan that gives you more time. But there’s no rule that says they have to agree to do this.
If you do have the money, and delay sending in what you owe without negotiating deferred payment, you’ll owe penalties and interest. You'll owe interest on what you owe at the current rate of 7 percent, along with penalties of .05 percent a month until the tax is paid in full or you hit the 25 percent maximum penalty.
Even if you can't pay one time, it pays to file on time: late filers owe a penalty of 4.5 percent of what they owe for every month they're late for up to five months. The minimum penalty is $100 or 100 percent of what you owe, whichever is smaller.
We suppose if you found an investment that gave you a guaranteed return higher than all these added interest and penalty costs, it might make sense.
And if you find such an investment, please let us know.
If an uncle, citizen of another country, wanted to give me 30,000 dollars. Do I have to pay taxes on it? Does he?
Ben -- New York city
Of all the wonderful things about receiving a gift, the nicest part is that you don’t owe taxes on it.
The so-called “gift tax” – paid by the person giving the money – applies to U.S. citizens who give away more than $11,000 to a single recipient in a calendar year. (If you’re married, you and your spouse can together give $22K tax free to any single recipient. Married couples on the receiving end count as two people, so a couple can receive $22K from any individual.)
For gifts from foreign individuals, you don’t need to report amounts less than $100,000. But if your uncle ever feels that generous in a calendar year, you’ll have to file Form 3250. And, of course, your uncle may owe taxes to his home country. (For that, he should check with a tax expert there.)
Depending on where your uncle lives, you may also want to check with the U.S. Treasury to make sure he’s not from a country on one of their watch lists. Banks are required to report all such transactions over $10,000 to the Treasury. So if you receive a gift for more than that amount, from someone in a country Uncle Sam doesn’t want you doing business with, the gift could be “blocked.” You can check the “Specially Designated Nationals and Blocked Persons” list on the Treasury’s Web site.
What are the rules for declaring your married child who is a college student your dependent?
Sandra M., Austin, TX
In general, they have to fit the IRS definition of a child, live with you, be a fulltime student under 24, and rely on you for more than half their support.
For details, see Publication 501 on the IRS Web site.
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