Category Archives: Income

Where Does All Our Money Go?

This weekend, I had two things to accomplish; get my tax return in order and begin to shop for a new truck. Given that this is a very busy time of the year for me, I decided to quietly shop on-line for that new pickup while she got all of her tax documents together.

Since I am the financial professional of the household, I decided to make preparing our return and buying a new truck a simple two-step process.

Step one: Review our gross income to begin tax preparation while getting a better handle on our finances. Step two: Convince my wife that there was still time this afternoon to go kick a few tires. Surely, given our income level, a new truck is affordable.

Step one started on a high note, both of our W-2 forms showed that we earned more money than we had in 2016. Should I get the white or the black, 5.7L 4×4 Toyota Tundra?

Step two was about to begin when my wife, who is not an accountant, asked a very simple question, “Why doesn’t it feel like we make this much money?” Followed by the second more difficult question, “Where does all of our money go?”

Being an accountant, I thought I would summarize our gross income, reduce it by our taxes withheld and then detail our household expenses to best illustrate how we spend our money.

My project got cut short when we began reviewing the difference between gross and net pay. I felt the purse strings start to tighten, and rationalized that a gently treated preowned Tundra might be just as good. Thanks to the Current Tax Payment Act of 1943, this upper-middle income family had 47% of our income taken off the top for Federal, State, Social Security and Medicare taxes. Tax withholdings aside, that still left us with plenty for a used truck, right?

Slowly my wife crossed her arms and asked about our 401(k) deductions. I reviewed with her the benefits that I was sure that she already knew about and explained that that too can directly off the top. Given the dollars that come directly from our gross pay, she suggested that it might be wise if we budget our expenses for the new year.

I am a CPA; I could surely whip up a budget before the dealership closed. We proceeded to draft our 2018 budget, while I closely monitored the time.

With 53% of our after tax and retirement savings left to budget, the numbers quickly unfolded; deduct 18% for housing, 8% for auto, 7% for food, 6% for healthcare, 5% to charity, 5% to savings, that left 4% for everything else. I thought we were done; I’ll take the 2014 black 4×4 Tundra please. “Did you budget for our after tax season trip to the Bahamas?” she asked.

It was then that I realized, my 2007 Toyota worked just fine.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

THE MANY FACES OF TAXABLE INCOME: GAMBLING & LOTTERY WINNINGS

Code Section 61 defines gross income, “except as otherwise provided,…gross income means all income from whatever source derived,” Regulation 1.61-1 further states that Gains from wagering transactions are included in gross income.

I suspect that most households participate in one way or another in the gambling industry. We purchase lottery tickets, enjoy an afternoon at the casino, a day at the race track, a night out for beano or maybe a little fantasy football. When we have a lucky day, how should the winnings be reported on a tax return?

Like much of the Code, gambling income and loss deductions are generally misunderstood. Gambling gain is defined as winnings less the cost of the winning bet. Gain transactions are included on line 21 on the front page of the 1040 and add to adjusted gross income. Substantiated gambling losses however, are allowed only to the extent of gambling gain transactions and must be reported on Schedule A. If you do not itemized deductions there is no benefit realized from the loss deduction.

What does the term gain “transactions” mean? I know, you all think that you learned the term in grade school; one bet is one transaction, right? Fortunately, that is not always the case. When it comes to a horse race or the lottery, a transaction is a single bet. It is not so clear when it comes to one hand of a poker game or one pull of a slot machine lever. Rather than define a transaction as a single pull of the lever, the definition is broadened to include all pulls until the winnings or tokens are cashed out for the “session”. Major relief, you can net gains and losses during a session, but what the heck is a session?

Notice 2015-21 helps gamblers better understand. The Notice takes no less than eight pages and seven examples to define a “session” of play. The abridged version is this: A session of play begins with the first wager of the day and ends with the last wager on the same type of game but not later than the end of the calendar day. Winning sessions are reported as gross income while losing sessions are deducted on schedule A.

A weekend of winning $20,000 on Saturday followed by losses of $20,000 on Sunday (two separate sessions), lead to increased gross income of the entire $20,000 with a deduction of $20,000 on Schedule A. Who cares? Well you might if you collect Social Security, receive advanced premium credits or take other deductions which might be limited when adjusted gross income exceeds certain thresholds.

Who would ever imagine that a breakeven weekend at the casino could cost thousands of dollars in income tax? Quit while you’re ahead. All the best gamblers do.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com

WHAT DO SUPER BOWL SUNDAY AND TAX RETURNS HAVE IN COMMON?

Other than the time of year they occur, the one shining answer is Fantasy Football Leagues. The popularity of these leagues have forced the IRS and Certified Public Accountants all over the United States to begin asking the question: Are my winnings from these online leagues taxable?

What is Fantasy Football?

Fantasy Football is defined to work in such a way that, according to the NFL, “You decide what type of league you want to participate in, acquire a roster of players (either through a draft or through auto pick assignment), then set your lineup each week during the season and watch as touchdowns, field goals, yards gained, sacks, interceptions and much, much more generate fantasy points for or against your team. Whether you win or lose and climb or fall on the leader board all depends on how well you maximize the talent on your roster each week.”

How Does This Affect My Taxes?

Just like any other sort of income, a determination must be made as to the taxability of such income. Unfortunately, the IRS has not ruled specifically on the treatment of Fantasy Football winnings, but there are options that fall under the treatment of online game-playing tournaments (IRS Letter Ruling 200532025).

What Are The Options?

There are three methods defined by the above mentioned IRS letter ruling and they are as follows:

Option #1: The Gross Method: This method would require the league administrator to report total winnings for the year on a form 1099-MISC when the player wins more than $600.

Option #2: The Net Method: This method requires everything from the Gross Method, but then subtracts any entrance fees paid for the winning contests only, creating a net amount that would be reported on the 1099-MISC. if over $600.

Option #3: The Cumulative Net Method: Taking it one step further from the net method, this method allows all entrance fees to be deducted from the winnings, regardless of winning that contest. If this amount is still over the $600, it will be reported on form 1099-MISC.
What Should You Do Next?

If you feel that this applies to your Fantasy Football League activities, please give Jessica Marin, CPA a call at Perry, Fitts, Boulette & Fitton CPAs and we will help you determine the best way to report on your tax return.