Category Archives: Tax Types

Funny Money – 4 Odd Types of Taxable Income

By: Alex Franch, BS EA

There are more ways to make money than just working or investing. If you come into some “funny money” – money won by bets, pools, gambling, illegal gains, or somehow, buried treasure – you can bet Uncle Sam still wants his share. Hey, it could happen.

Football Pool Winnings

funny money taxable incomeMy 9th place fantasy finish does not qualify me for funny money. However, if you actually won money in a fantasy football pool or league, this money is taxable income. In most cases, this would be considered gambling income and would be reported as Other Income on line 21. You could also deduct your gambling losses on Schedule A.

That is interesting, but many people are aware of this one. However, did you know that on your Massachusetts tax return, you can deduct the price of your wager? Depending on your pool or league, this can be more than a couple of bucks. You can do the same for those $30 scratch tickets. However, if that deduction happens to be greater than $20, you cannot take both the deduction and e-file your return.

Gambling Winnings

My wife and I like to joke about stopping at Mohegan Sun to see an old crooner play whenever we are on I-95 in Connecticut. We might even have a go at the roulette or blackjack tables. In the event that we win, that income would be taxable at the Federal and State levels, and not just Massachusetts. If you have gambling winnings in Connecticut, Rhode Island, or virtually every other state that has casinos or a lottery, then you may be liable for income tax in that state. Depending on the amount of your winnings, you might have the privilege of filing an additional state tax return.

Illegal Gains

Any income from illegal activity is taxable income. It is recorded either on the Form 1040 as Other Income on line 21 or Schedule C income. Funny money from drugs, embezzlement, bribes, larceny, etc. are all earned income. This taxable income should be reported on your tax return, otherwise you might be charged with tax evasion in addition to whatever crime generated the income. Does the IRS rat you out to the coppers? The IRS will not comment on this. However, it is suspected that there are enough loopholes in the tax return confidentiality rules that the IRS likely does tip off other law enforcement agencies. Remember, that’s how they got Capone.

Buried Treasure

taxable-incomeMy son might be in trouble one day. He loves digging in the yard for buried treasure. I even planted a box of coins for him once. He has also found old whiskey bottles (circa 1920), farm tools, railroad track parts, and other tetanus carrying stuff in my 150 year old back yard. If he ever hits the mother lode, he would have to pay income tax on the treasure. He won’t have any taxable income when he sells it, but he will have to pay the tax when he finds it. I am hoping for a 1913 Liberty Head V Nickel to show up one of these days . . .  then he can pay for his own college.

Questions About Taxable Income?

Maybe you have funny money of your own. Well, at the very least, maybe you have income you are not quite sure how to record on your tax returns. If you have thoughts, questions or concerns regarding how your taxes are filed, WorthTax uses a triple check accuracy system. We also though great lengths to protect your information on secured servers. Please feel free to contact us, leave your comments below or post to on our FacebookGoogle+ or LinkedIn pages.

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Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

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Taxing the Robots

 

By: Alex Franch, BS EA

robotThese days, we are constantly bombarded with economic data. I ask myself, what does all the labor market data have in common? It is clear that the robots are taking over our jobs.

While automation has entered into every field, let us focus our discussion around the auto industry as the poster child for the displacement of workers in favor of robots. Tony the mechanic used to tighten the alternator mounting bolts at his station on the assembly line. He made $50,000 per year and paid $3,825 in Social Security & Medicare taxes plus $5,000 in Federal Income Tax. His employer ponied up an additional $3,825 Social Security and Medicare match. He cost the company $7,500 in employee benefits (mostly health insurance). All in, Tony costs his employer $61,325 per year to tighten those bolts.

Robot? What the HAL?

Along comes the new ‘Hands-free Alternator Linker’ or HAL. HAL cost the company $100,000 up front to do the same job as Tony. HAL is also under warranty for ten years so we can ignore maintenance costs for now. Over the next ten years, HAL cost the company an average of $10,000 per year. Where does the other $51,000 go?  Some of it will result in cheaper cars for all of us and make the auto manufacturer more competitive. Some will trickle up to the CEO. Some will trickle out to the shareholders.

Robots? How does it compute?

The consumers save money on the cars. The additional income to the CEO & shareholders will be taxed in various ways. Let’s split the $51,000 savings three ways between these 3 groups:

  1. $17,000 vanishes into the ether of macroeconomics in the form of lower car prices.
  2. $17,000 goes to the salaries of the CEO and the management team.
  3. $17,000 goes to the shareholders in the form of dividends.

The CEO pay and dividends (due to the double taxation of dividends) will be taxed at about 40% to 45% or $15,000 total. HAL’s $15k sounds better than the $12,650 Tony’s job generated in tax revenues. However, Tony is now out of a job, and the $15,000 in tax revenues generated by HAL, are now paid to support Tony (through the ether of the vast government safety net).

Should HAL help pay to retrain Tony through taxation?  After all, robots are why he lost his job in the first place. That is the question of the day. How can we tax robots you ask? Corporations, Trusts, and Estates all pay taxes and they only exist on paper. HAL is a red eyed bundle of circuits and metal. There are countless categories of products used for computing sales taxes when you consider all fifty states. Essentially, we have mechanisms for creating a new legal category and tax framework. Just be nice to HAL, he had some workplace troubles back in 2001.

Perhaps Tony can one day get a new job as a bureaucrat who oversees the taxation of robots. His new job would be to create more red tape and volumes of bylaws, policies, and procedures, thus making himself a productive member of society once again.

Do you have any questions?

Do you have thoughts, questions or concerns regarding about taxes? Maybe you need help having your taxes filed. WorthTax has ultra convenient services. Feel free to contact us, leave your comments below or post to on our FacebookGoogle+ or LinkedIn pages.

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Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

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What Types of Taxes Are You Paying?

by Alex Franch, Tax Specialist

What types of taxes are you paying? Or another way to ask this is, what are the different types of taxes are you paying?

1. Federal income tax (The more you make the more they take)

The-more-you-make-the-more-they-take

FIT is a progressive tax. The rate of taxation increases along with your income.  If you (married, 2 kids, house, mortgage) are making $100k & your tax is $5,316, FIT doesn’t seem so bad.  Your kids, real estate taxes, and mortgage are all subsidized.  Let’s fast forward a couple of years and things are going really well.  You landed a killer job and scores a few raises and you are now making $200k.  Your tax did not double, nor did it triple, in fact, you tax went up by nearly a magnitude of six to $30,422.  Your marginal tax rate may show 25% but it is really 30% because all that stuff being subsidized is being phased out.

2. Old-Age, Survivors, and Disability Insurance (OASDI aka Social Security)

SS tax is a regressive tax and it applies on an individual basis rather than household as the FIT.  You as an individual only pay on the first $117k of your income and then you are done for the year.  If you made $117k and your spouse made another $117k, you paid just as much in SS tax as Warren Buffet and Bill Gates combined.

3. Medicare Tax (was flat, now not so much)

Medicare tax was traditionally a flat 1.45% on your earned income.  This last year it was expanded to include an additional 0.9% above certain incomes and 3.8% on certain types of passive income.

4. Capital Gains (including LT, ST, recapture, etc.)

This tax is like a game of ‘whack-a-mole’  Capital gains often depend on two things, the length of time an asset is held AND the type of asset.  I can think of the following rates: 0%, 5%, 15% 18.8%, 20%, 23.8%, 25%, 28%, and all the FIT rates which may apply.  This is what compromise looks like.

5. Alternative Minimum Tax

Everyone who wanted a ‘flat’ tax and got it now hates it.  There are only two rates, 26%, and 28% so on the face, it seems like a fairly flat tax.  However, your marginal rate can be as high as 35% because all your write-off’s are being phased out.

6. State income taxes (not so united)

By my last count, we have 7 states with no income tax, 36* states (including DC) with a progressive income tax, 6 states with a flat tax (including Massachusetts), and 2 states (Tennessee and New Hampshire) that tax just dividends and some other miscellaneous items.

*4 of these states have the top tax rate that begins under $10k which would make them almost ‘flat.’

7. Sales Tax

Let’s classify every type of transaction and assess a different rate on each depending on where you are and where you live.  Also, let’s make sure businesses have to report on a monthly basis.  Also, you may have to report this on your personal tax return depending on where you bought stuff and where you keep that stuff.

8. Other Use Taxes (Real Estate, excise, etc)

I guess you kind of get what you pay for on this.

I’m sure I am missing another few dozen taxes that we pay on a regular basis.  I also haven’t touched upon corporate, trust, or estate taxes.  Please feel free to write in if you hear of any interesting taxes out there.

 

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