The Provision of the Information on Tax Treatments Report

Exclusively available on Available only on IvyPanda® • No AI

Tax Topics Report

Taxation is a fundamental element of the functioning of any state. It provides the government with money needed to support people, creates environments beneficial for their development, protects them, and satisfies their basic needs.

For this reason, any citizen should be ready to pay taxes to support the further development of the country. At the same time, the sophistication of the modern world results in the appearance of a complex taxation system that contains many regulations and requirements. The complexity of this framework might be confusing for people and presuppose some difficulties with the determination of various types of payments that are obliged to do. The primary goal of the given report is the provision of information on tax treatments to improve their understanding and outline general peculiarities of the existing system.

Rental Income

Questions about rental income are among the most popular ones. First, it can be determined as any payment a person receives for the occupation or use of a particular property (“Tips on rental real estate income”, n.d.). All citizens are obliged to report this sort of earnings following the current legislation. Moreover, it is critical to provide information about all properties an individual owns at the moment (“Tips on rental real estate income”, n.d.).

It means that a taxpayer should describe rental income and expenses using Form 1040, Schedule E, Part I (“Tips on rental real estate income”, n.d.). If there are more than three buildings or rooms, additional Schedules E should be completed (“Tips on rental real estate income”, n.d.). It guarantees that all existing payments will be considered and no problems with taxation will emerge. If a person receives some services instead of money as a payment, they should also be mentioned considering their real market value.

Long Term Capital Gains and Losses

Properties or capital that a person owns and uses for various purposes can be determined as a capital asset. In other words, homes, rooms, and cars can belong to this category. Deals presupposing sales of capital assets precondition the appearance of gains or losses that should be reported. If a person owns property or some other object for more than one year before any alterations, the capital loss is determined as long-term (“Topic No. 409”, n.d.). It means that one should be accurate in formulating for how long the asset is held as various types of taxations are applied. All sales and other transactions related to long-term capital gains and losses should be reported using appropriate forms to include all payments and avoid problems with the law (“Topic No. 409”, n.d.). If the income is higher than losses, additional tax rates are introduced.

Annuity Income

First of all, it is critical to remember that annuities are tax-deferred, which means that there are some advantages as investments might grow faster. However, it does not mean that there are no dues associated with this income at all. The annuity payments are taxable if a person has no investment in the contract because of the following list of factors:

There is no individual’s contribution to pension or annuity
There are no contributions from the salary by an employer
All contributions were received before (“Topic No. 410”, n.d.)

Annuity income can also be partially taxable if a person adds after-tax dollars to a pension (“Topic No. 410”, n.d.). In this case, taxes are not paid for part of this new amount of money. In such a way, there is a protection that ensures that retired people will be able to acquire the fund needed to support their living.

Settlement of Lawsuits or Court Judgments

If a person acquires money as a result of a lawsuit judgment or settlement, he/she has to pay taxes introduced by the IRS. In all cases, it depends on the main features of the trial and results. For instance, compensation for emotional or mental distress will be taxed as income, but any additional treatment will be tax-free (IRS, 2011). Lost wages and punitive damages are also taxable as they are considered additional payments and should be reported as any other financial operations (IRS, 2011). For this reason, any court judgment should be treated from the perspective of the IRS as the agency responsible for the observation of taxation and its effective functioning. Individuals can be recommended to consult with a specialist to avoid misunderstandings or problems related to this aspect.

Discharge of Indebtedness Income

Another problematic area associated with taxation is the discharge of indebtedness income as many individuals might have problems with its poor understanding. One should remember that if a person borrows any sum of money, he/she also acquires a debt (“Topic No. 431 canceled debt”, n.d.). There are special rules for incomes associated with this issue. If there is a cancellation of payments because the whole debt is forgiven or discharged, the amount of the canceled debt becomes taxable (“Topic No. 431 canceled debt”, n.d.). Every person should be ready to report it and pay the determined sum. At the same time, there are some exceptions such as gifts or inheritances, education loan repayments, or special forgiveness programs that are created for various groups of people (“Topic No. 431 canceled debt”, n.d.). In general, the given approach ensures that all possible transactions associated with this issue will be considered.

Scholarship

Another vital topic is the scholarship and the way it is taxed. First, it can be determined as an amount of money needed for a student to study in a particular educational institution (“Topic No. 421 scholarships”, n.d.). If a person receives this sort of payments, it can be tax-free; however, some important factors should be considered:

A person studies in an educational establishment that has a regular faculty and curriculum.
Money that is used to pay for an education that is provided for a person, and for things critical for it (books, equipment, supplies) (“Topic No. 421 scholarships”, n.d.).

However, money used for renting a room, optional devices, additional tutoring, traveling, and courses are taxable as they are not critical for activities associated with the central purpose of scholarship (“Topic No. 421 scholarships”, n.d.). In such a way as, reporting payments, a person should consider these factors.

Divorce Payments: Alimony vs. Child Support vs. Property Division

Divorce payments are another important aspect of the existing taxation system. By the current regulations, alimony is tax-free for a person who pays and taxable for those who receive them (“Topic No. 452 alimony”, n.d.). At the same time, all amounts of money paid as child support should be reported and taxed (“Topic No. 452 alimony”, n.d.). It guarantees the appropriate distribution of funds and the effective functioning of the financial system. In many cases, recipients of alimony want to be it in the form of child support to avoid additional taxes (“Topic No. 452 alimony”, n.d.). Ex-spouses should also pay for property that is now owned by them under the court’s decision. In such a way, it is critical to consider these factors to ensure that the existing regulations are observed.

Prizes Winnings

In terms of the existing legislation, prizes, both cash or property, are taxable. The federal government considers awards, lottery winnings, and other sorts of payments ordinary income regardless of their size (“Topic No. 419 gambling income”, n.d.). Even if a person does not make any effort or perform special activities, the same approach to taxation is utilized. That is why, the U.S. government determines the tax rate resting on the income and introduces a special legal framework for payments (“Topic No. 419 gambling income”, n.d.). It is critical for individuals who acquired money in this way to report in short terms; otherwise, their actions will be considered a crime and an attempt to avoid taxes.

Gambling Winnings

The existing rules state that all gambling winnings are fully taxable as they are a part of persons’ revenue. Any individual should report the income on the tax return to observe the existing law (“Topic No. 419 gambling income”, n.d.). The given broad category includes raffles, horse races, casinos, lottery winnings (“Topic No. 419 gambling income”, n.d.). The cars or offered trips should also be included in the report regarding their real market value to ensure correct taxation. If a person has any sort of gambling prize, he/she can be demanded to pay an estimated tax because of the appearance of additional income (“Topic No. 419 gambling income”, n.d.). These rules regulate the taxation policy regarding the given aspect and should be observed.

Consulting income

Consulting is a popular occupation that provides individuals with stable revenue. However, they should remember that any money acquired in this way is taken as a regular income and should be mentioned in the report to pay appropriate taxes. The current approach states that the marginal tax rate depends on the sum of money acquire, and it grows with it (“Self-employed individuals tax center”, n.d.). For this reason, the IRS recommends making quarterly payments that are calculated resting on the topical and estimated tax liability (“Self-employed individuals tax center”, n.d.). It will help to avoid misunderstandings with the demanded amount of money and guarantee that individuals who earn money in this way will have no problems with taxation policy.

Non-Cash Transactions

All non-cash transactions should also be reported as they are a part of the financial sphere. The relevant approach to taxation presupposes that a person who is involved in this procedure should be ready to provide all necessary information about it to avoid problems with the law (“Cash payment report”, n.d.) For instance, the cancellation of debt mentioned above is also considered a non-cash transaction that should be reported as is a part of individuals’ income, and the same rules are applicable here.

Conclusion

Altogether, the income items mentioned above have various aspects that should be considered when reporting. The improved knowledge of the most important features and the topical approach to taxation might help individuals to avoid problems or misconceptions and enjoy benefits that are associated with the existence of gaps in modern legislation.