December 2023

Important Tax Dates and Deadlines in 2024

Updated for tax year 2023.

Get ready to mark these important dates on your calendar. Here are the most important tax deadlines and due dates for taxpayers to be aware of in 2024 (and answers to some common tax questions).

When are taxes due?

In 2024, Tax Day falls on April 15. This is the deadline for filing your taxes as a calendar year filer.

The April 15 deadline applies to traditional employees who receive a W-2, self-employed sole proprietors (including freelancers, independent contractors, or gig workers), retirees, multi-member LLCs, and corporate returns.

What is the deadline for filing taxes as a business?

There are two exceptions to the April 15 tax deadline — the due date for partnerships and S corporations to file their business return is March 15, 2024.

Why is Tax Day 2024 on April 15?

Typically, the tax due date is April 15 unless that day falls on a weekend or a holiday. In that case, Tax Day is usually pushed back to the next business day.

What time are taxes due on the 15th?

You must file your taxes by 11:59 p.m. on April 15, 2024. This is the last day to file and pay without penalty unless you request a tax extension. Once the clock strikes midnight, you risk potential late fees and late filing penalties. If you need more time to file, you must request an extension (more on that below).

Do you have to have your taxes done by April 15?

If you can’t file your income tax return by April 15 this year, you can give yourself more time by requesting an automatic tax extension. You can do this when e-filing with TaxAct® by filing IRS Form 4868 before the tax deadline (April 15, 2024). We’ll walk you through the process, help you claim relevant tax deductions and tax credits, and assist you in filing any state extension forms as well, if necessary.

Make sure you file for an extension before the tax deadline. If you don’t file for an extension before the Tax Day due date, you risk being charged late fees and penalties.

Once you’ve filed for an extension, you will have until Oct. 15, 2024, to complete and file your 2023 federal tax return. Like Tax Day, the extension deadline is typically Oct. 15, unless the 15th falls on a weekend or holiday.

One important note — filing an automatic tax extension only gives you more time to file. It will not give you more time to pay any taxes due. When you request an extension with Form 4868, you’ll be able to estimate and pay any taxes due for 2023. If you’re expecting a tax refund and don’t anticipate owing any taxes, you should be in the clear.

If you need more time to file your business tax return, you can also request a business tax extension. Partnerships, multi-member LLCs, and corporations can file an extension using Form 7004. Sole proprietors and single-member LLCs will use Form 4868. You can request an extension using either of these tax forms when e-filing with TaxAct using our tax preparation software.

Since businesses have an earlier tax filing due date (March 15), the IRS also gives them an earlier extension due date. The tax deadline for filing an extended business tax return for 2023 is Sept. 16, 2024.

What is the tax deadline for the first quarter of 2024?

April 15 is also the due date for first quarter estimated tax payments. This due date applies to those with little or no income tax withheld from their wages, such as freelancers, small business owners, and investors.

The due dates for this year are as follows:

What is the September 15 tax deadline?

Sept. 15 is the typical tax filing deadline for Q3 estimated tax payments. It is also the typical tax due date for partnerships and S-corporations that requested a business return extension. However, the deadline for both in 2024 is Sept. 16, as the 15th falls on a Sunday.

What are the tax deadlines for 2024?

Depending on your tax situation and what kind of filer you are, there are different tax dates to be aware of. Below are the important tax dates and deadlines for individual filers, including those who are retired, an employee, or self-employed.

Tip: Before filing, estimate your potential income taxes using our tax calculator.

Jan. 16, 2024– Tax payment due for 2023 Q4 estimated tax payments for self-employed individuals or those with other income without tax withholding.
Jan. 23, 2024– The expected launch of tax season 2023 — the IRS is expected to start accepting and processing income tax returns for 2023 on this day.
Jan. 31, 2024– Employers must send W-2 forms no later than this date (you still might receive yours in early February). This is also the deadline to send certain 1099 forms, including 1099-NEC, which reports self-employment income from side hustles or freelance work. You might also receive a Form 1099-MISC if you received income from interest or dividends, rents, royalties, or prize winnings.
Feb. 15, 2024– Deadline to reclaim your exemption from withholding. This applies if you choose to claim an exemption from your employer withholding taxes from your paycheck on your Form W-4. To continue to be exempt from withholding, you must give your employer a new Form W-4 by this date every year.
April 1, 2024– Due date to take the required minimum distribution from your retirement account if you turned 73 during the 2023 calendar year.
April 15, 2024– Tax Day deadline to file or e-file your federal income tax return (and most state tax returns, if applicable). There are some exceptions for certain states — Maine and Massachusetts state taxes are due April 17; Delaware and Iowa state taxes are due April 30; Hawaii state taxes are due April 20; Virginia state taxes are due May 1; and Louisiana state taxes are due May 15.

This is also the deadline to request an extension by filing Form 4868 and to pay any taxes due from tax year 2023 (even if you are requesting an extension).
You must also make HSA and IRA contributions for tax year 2023 by April 15, 2024.
April 15 is also when estimated tax payments are due for the first quarter of 2024.

June 17, 2024– The due date for 2024 Q2 estimated tax payments.
Sept. 16, 2024– The due date for 2024 Q3 estimated tax payments.
Oct. 15, 2024– If you filed for an extension, this is the deadline to file your 2023 income tax return.
Jan. 15, 2025– The due date for 2024 Q4 estimated tax payments.

When are business taxes due?

While many deadlines below are similar to individual due dates, small business owners have some unique tax due dates to keep in mind. The list below doesn’t cover every tax deadline, but we’ve included some of the most important ones to remember.

Jan. 16, 2024– The due date for 2023 Q4 estimated tax payments.
Jan. 31, 2024– Deadline for employers to send W-2 forms to their employees. This is also the deadline to send out certain 1099 forms such as 1099-MISC, 1099-NEC, or 1099-K.
March 15, 2024– Taxes are due for partnerships, S corporations, or multi-member LLCs taxed as partnerships. This is the due date for calendar year business filers. If your business uses a fiscal year instead, your tax due date is the 15th day of the third month after the close of your tax year. For example, if your business’s fiscal year is June 1 – May 31, your business tax return due date would be Aug. 15 — three months and 15 days after May 31.

March 15 is also the deadline for the above-mentioned business types to request an extension and the deadline to file Form 2553 to switch your business election to an S corp for tax year 2024.

April 15, 2024– Tax filing deadline for C Corporations (Form 1120), sole proprietors (Schedule C), single-member LLCs, and LLCs taxed as corporations. If your business uses a fiscal tax year, you must file your business tax return by the 15th day of the third month after the end of your tax year.

This is also the deadline for the above-mentioned types of businesses to file for a tax extension.

June 17, 2024– The due date for 2024 Q2 estimated tax payments.
Sept. 16, 2024– The due date for 2024 Q3 estimated tax payments. This is also the deadline for partnerships and S corps that filed a tax extension to submit their tax returns.
Oct. 15, 2024– The tax deadline for C corporations that filed a tax extension.
Jan. 15, 2025– The due date for 2024 Q4 estimated tax payments.

If you’d like a complete picture of all the 2024 tax calendar due dates, head to IRS Publication 509.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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How Your Year-End Bonus Is Taxed

Updated for tax year 2023.

If you work as an employee, you’re probably used to having income tax withheld from your paycheck. When you get a bonus, however, there may be more confusion about how it’s taxed and what will be left over.

Here are the most important things to know about how bonuses are taxed.

At a glance:

Most employee bonuses are taxable like regular wages, but small non-cash bonuses like event tickets or holiday gifts may be nontaxable.
Your employer has two options when taxing your bonus: taxing them at your regular rate or using a 22% flat tax rate.
Bonuses are included in your Form W-2, reported in Box 1 along with other wages.

Employee bonuses are taxable, just like ordinary wages.

Whether you receive a bonus in the middle of the year or at the end, your employer must withhold 6.2% for Social Security tax and 1.45% for Medicare tax. Those are the same values they withhold from every paycheck you receive. Your employer then matches those amounts and pays the IRS on your behalf.

Additionally, your employer must withhold federal and state income tax from your bonus. The bonus amount is also included with your other taxable salaries and wages on your Form W-2 at the end of the year.

Your employer has two options for withholding income tax.

Your employer can determine how much income tax to withhold in one of two ways:

Aggregate method: Your income tax withholding is calculated as if your bonus was added to one of your regular paychecks. This means it will be taxed at your typical tax rate depending on your tax bracket.
Flat percentage method: The IRS also allows employers to simply withhold a flat 22% from each employee’s bonus for income tax. That is in addition to the Social Security and Medicare taxes as well as any state income tax. If your bonus is over $1 million, the first $1 million has a 22% tax withheld for federal income tax. Anything you receive over $1 million is taxed at 37%. That method is only available for employees who have income tax withheld from regular wages for the year or the preceding year.

Form W-2 reports your bonus.

When you get your Form W-2 next January, your bonus is already included in your wages and salaries in Box 1. You don’t need to do anything else to report your bonus to the IRS.

Not all bonuses are taxable.

If you get small, non-cash bonuses from your employer, you don’t have to report them as income or pay tax on them. Nontaxable bonuses include things like sporting event tickets, holiday parties, and that giant tin of popcorn that takes a month to eat.

Be aware that calling something a “gift” doesn’t make it nontaxable, however. If your employer gives you $500 cash at Christmas, that’s a taxable bonus.

Reduce the tax bite on your bonus.

A little tax planning can help you keep more of your tax bonus – or at least make better use of it. For example, you could increase the amount you contribute to your 401(k) plan or other retirement account to offset the extra tax owed on your bonus.

You could also use part of the money to increase your charitable contributions or other deductible expenditures. If you itemize deductions, that will help reduce your total tax bill for the year.

Adjust your Form W-4 before or after your bonus.

If you want to have more or less income tax withheld from your bonus, you can ask your employer if they use the aggregate method or the flat percentage method. Depending on their answer, you may consider filing a new Form W-4 shortly before the bonuses come out to have less tax withheld from the bonus. TaxAct has a handy W-4 calculator that can help you fill out your W-4 form in the way that’s most beneficial for your goals and tax situation1.

You can also file a new Form W-4 after you receive your bonus to reduce the extra withholding. As a result, you’ll get more money in each paycheck for the rest of the year instead of waiting for it to come in the form of a tax refund.

1Refund Booster may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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How to Avoid Delays When Filing Your 2023 Tax Return

Both taxpayers and the IRS sometimes face challenges when filing and processing federal tax returns. To help you out, here are five tips that will help you avoid delays and ensure a smoother tax filing process for both sides.

Tips to help you avoid delays while filing taxes

1. Collect all tax documents before filing

To file the most accurate federal income tax return and avoid discrepancies, ensure you have received all the tax forms you need beforehand. You don’t want to omit a vital form accidentally! Make sure you’ve collected all the W-2s, Form 1099s, and any other tax documents detailing your income from last year before you file. Entering inaccurate info could result in costly delays and the potential to miss out on valuable tax credits.

2. E-file your return and use direct deposit to prevent refund delays

Filing paper returns by mail is more tedious for both parties. If you want your return processed quickly, e-filing is the way to go this tax filing season if you have that option.

And here’s another tip — if you want that tax refund money in your bank account as quickly as possible, opt for getting your refund via direct deposit. Combined, these two steps will help ensure swift processing of your tax return and your tax refund amount.

3. Find answers to tax questions online

It’s normal to have questions come up when you’re filing your income tax return. If you need a tax question answered, we recommend looking up the answer to your inquiry online rather than calling the Internal Revenue Service. Calling the IRS can often result in lengthy phone delays.

If you file with us at TaxAct®, we also offer Xpert Assist1 as an add-on feature, which allows you to connect with a tax expert to answer questions you may have about your tax return.

If you’d rather do your own research, try searching our blog for a helpful article or tax calculator related to your situation. The IRS also has a valuable collection of online tools that can assist you in everything from tracking your refund (Where’s My Refund?) to checking if you are eligible for certain tax deductions or credits.

1Xpert Assist is available as an added service to users of TaxAct’s online consumer 1040 product. Unlimited access refers to an unlimited quantity of expert contacts available to each customer. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. Review of customer return is broad, does not extend to source documents and not intended to be comprehensive; expert is available to address specific questions raised by customer. View full TaxAct Xpert Assist Terms and Conditions.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post How to Avoid Delays When Filing Your 2023 Tax Return appeared first on TaxAct Blog.

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How Are the Child Tax Credits Different?

Updated for tax year 2023.

Wondering how the Child Tax Credit (CTC) works for your 2023 taxes? Here are the main things to note:

Max credit amount:

The Child Tax Credit’s maximum amount is still $2,000 per child (unchanged from 2022).

Child’s age:

Children must be under age 17 to qualify for the credit in tax year 2023.

Refundability:

Up to $1,500 of the Child Tax Credit is refundable for 2023, meaning you can claim up to that amount as a tax refund even if you don’t owe any income tax.

Advance monthly payments:

There were no advance monthly payments for the CTC in 2023.

Income phaseout threshold:

The credit amount you qualify for starts decreasing once your modified adjusted gross income (MAGI) hits a certain threshold: $400,000 for joint filers or $200,000 for all other filers.

Child Tax Credit (CTC) vs. Additional Child Tax Credit (ACTC) in 2023

The Additional Child Tax Credit (ACTC) is the refundable part of the Child Tax Credit. For 2023, this amounted to $1,500. This means if you owed less income tax than the credit amount, you could qualify to claim the Additional Child Tax Credit (ACTC).

The CTC continues to determine your eligibility for the ACTC. If you don’t qualify for the CTC, you can’t take the ACTC. To determine if you’re eligible, you can fill out Schedule 8812.

The Child and Dependent Care Credit

Looking for more information on the Child and Dependent Care Credit? Check out Form 2441 FAQs: The Child and Dependent Care Credit.

This article is for informational purposes only and not legal or financial advice.

The post How Are the Child Tax Credits Different? appeared first on TaxAct Blog.

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Head of Household vs. Married Filing Jointly: Which Tax Status is Right for You?

When it comes to taxes, picking the right tax filing status can make a big difference in what you owe or get back. Head of household and married filing jointly are common filing status options, and each comes with its own eligibility criteria. You can only qualify for one or the other, not both, so let’s break down each filing status and see which one may be best for you.

At a glance:

You can only claim head of household filing status if you are unmarried.
Filing as head of household gives you a higher standard deduction than as a single filer.
Married filing jointly makes sense for many married couples, with a few exceptions.

Head of household

First, let’s break down the head of household status.

Eligibility criteria:

This status is for those who are single but have dependents. You qualify for head of household filing status if you’re unmarried (or considered unmarried for tax purposes) and pay more than half the cost of housing and support for a qualifying person — a child, parent, or other dependent — for over half the year.

The IRS considers you to be unmarried if:

You haven’t lived with your spouse for the last six months of the tax year (temporary absences do not count)
You paid more than half the cost of household expenses during the year (such as mortgage interest, rent, property taxes, utilities, repairs, food, etc.)
Your home is the primary residence for your child
You plan to file a separate return from your spouse

To qualify as your dependent, the person must be:

A child under 19 at the end of the calendar year (or under 24 if the child is a full-time student)
A parent, if you provide at least half of their support (they do not necessarily have to live with you)
A qualifying relative, such as your grandparent or sibling, if you provide at least half of their support and they meet other criteria (as listed in IRS Publication 17)

Tax benefits:

People claim head of household status mainly because it gives you a bigger tax break. If you are unmarried, filing as head of household means you can claim a higher standard deduction than you would if you filed as single, meaning it reduces your taxable income more. For 2023, the standard deduction for head-of-household filers is $20,800 compared to $13,850 for single filers.

Scenario:

If you are a single parent raising a child on your own and footing most of the bills, you would likely qualify for head of household status, giving you a larger deduction than you would get as a single filer.

Married filing jointly

Now, let’s talk married filing jointly. This status is for married couples and allows them to file one combined income tax return.

Eligibility criteria:

Compared to head of household, the eligibility requirements for married filing jointly are pretty straightforward. To use this filing status, you simply need to be legally married by the end of the tax year and report your combined income with your spouse.

Tax benefits:

The main perk of married filing jointly is you only have to file one income tax return instead of two. This contrasts with married filing separately, where you would both file individual income tax returns.

In many cases, you will end up with less tax liability when filing jointly than if you filed as married filing separately. It can also open the door to more tax deductions and tax credits you would not qualify for if you filed separately, such as the Earned Income Credit or Child Tax Credit.

However, some exceptions exist where married filing separately may be more beneficial. We’ll go over some of those scenarios below.

Scenarios:

Let’s imagine you are legally married. Both you and your spouse work, but neither of you makes significantly more money than the other. You trust that your spouse is financially responsible and isn’t hiding any income. In this case, filing jointly as a married couple would probably be a good option for you.

Now, let’s say you and your spouse both work, but you have a much higher income and are in an entirely different tax bracket than your spouse. Your spouse had a lot of out-of-pocket medical expenses during the tax year. Since the IRS only allows you to deduct medical expenses exceeding 7.5% of your adjusted gross income (AGI), it may benefit you and your spouse to file separately. That way, your spouse’s AGI will be much lower than if you used your combined income, and they can claim a bigger tax deduction.

Lastly, if you are considering divorce or worried your spouse may be hiding something, it may be a good idea to file separately for your peace of mind. Just remember that both spouses must be on the same page when you choose to file separately. For example, if your spouse claims the standard deduction, you will have to do so as well — you won’t be able to itemize your deductions.

If you’re uncertain which filing status to choose, filing with us at TaxAct® may be beneficial. We’ll ask you some interview questions and suggest the most beneficial filing status for your situation based on your answers.

Key differences between head of household vs. married filing jointly

Now, let’s recap the main differences between filing as head of household and married filing jointly:

Marital status: If you’re unmarried with kids, you likely qualify for head of household status. If you are married, you don’t qualify for this status, but you could likely benefit from joint filing with your spouse.
Dependents: Filing as head of household requires you to support a qualifying person, while married filing jointly involves filing with your spouse — it doesn’t matter whether you have dependents.
Tax rates and deductions: Each status offers different tax rates and deductions. Head of household might mean lower rates and a higher standard deduction, while married filing jointly might open doors to different deductions and credits.

The bottom line

Choosing between head of household and married filing jointly boils down to your marital status and dependents. If you’re a single parent supporting one or more dependents, head of household might be right for you. If you’re married, and like the idea of filing your taxes together, married filing jointly could be the winning move.

We know tax rules can get messy, so if you’re still unsure, our tax prep software can help you pinpoint which filing status might be right for you.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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How to Pick Your Filing Status

Updated for tax year 2023.

When you file, your tax filing status makes a big difference in your tax return. Many people simply choose the status they believe best fits their situation, but you may have more than one option in some cases. At that point, it’s up to you to pick the status that offers you the most tax advantages.

Read on for an overview of each tax filing status and learn how to pick the right one for your tax situation, including important information on how to file taxes.

What are your tax filing options?

As of 2023, there are five tax filing statuses to choose from:

Single
Head of household
Married filing jointly
Married filing separately
Qualified widow or widower

We talk about each tax filing status in more detail below.

Single

2023 standard deduction for single filers: $13,850

Most people have probably filed as single at some point in their lives. Simply put, the single filing status is for those who are unmarried and don’t meet the qualifications of any of the other filing status.

Head of household

2023 standard deduction for head-of-household filers: $20,800

The head of household filing status is typically for unmarried people who financially support other people, but the name of this tax filing status can be confusing. Filing as head of household instead of single can be more advantageous because it offers a bigger standard deduction.

Often, people think that if you are married and are the only income earner in your household, you qualify as head of household, but that is incorrect. To be eligible for that status, you must be unmarried and provide the majority of financial support for at least one other person for the better part of the year.

You must fit the IRS definition of being unmarried. If you are not legally married, the IRS considers you unmarried. You are also considered “unmarried” if:

You haven’t lived with your spouse for the last six months of the tax year
You paid more than half the cost of your home during the year
Your home is the primary residence for your child
You plan to file a separate return from your spouse

To be considered head of household, the IRS also looks at your qualifying person — otherwise known as your dependent(s). A child is the most obvious dependent, but to qualify as a dependent, the child must live with you for over half a year and be under 19 years old. The child can also be under the age of 24 if they are a student.

Your parents can also count as qualifying dependents. To claim head of household status in this instance, you must prove that you pay for over half of your parents’ financial needs (even if they don’t live with you).

Married filing jointly

2023 standard deduction for joint married filers: $27,700

The married filing jointly filing status is relatively straightforward. To use this filing status, you must be legally married and report your combined income with your spouse. As a married couple, you only have to file one income tax return. You also claim all of your combined tax deductions and tax credits on the same tax return.

One advantage of filing jointly includes only having to complete one tax return. It’s also likely that you will end up with a smaller tax liability than if you filed separately. On the other hand, if your spouse isn’t responsible for their finances, you are held liable for paying the IRS. If you’re unsure if married filing jointly is right for you, check out I’m Married, What Filing Status Should I Choose?.

Married filing separately

2023 standard deduction for separate married filers: $13,850

Since filing jointly with your spouse usually brings less tax liability, what are the advantages of filing separately? Often the most significant reason married couples choose to file separately is that one of the spouses has a large amount of out-of-pocket medical expenses. Since the IRS only allows you to deduct the amount that exceeds 7.5% of your adjusted gross income, it can be next to impossible to claim the majority of those costs if you and your spouse have a high combined income.

Married couples may also choose to file separately if one of the spouses does not trust how their partner handled their finances during the year. Filing separately can be a way to avoid being on the hook to pay the other spouse’s tax liability. Also, if a couple is divorcing, they may choose to keep their tax returns separate. Although, if their divorce is not finalized by Dec. 31, they can still file a joint return if they choose.

It’s important to note that being married but filing separately is not the same as filing single. Each status has an entirely different tax bracket. Married couples who file separately typically pay more in taxes than married couples who file jointly. That is because separate filers cannot claim several of the tax deductions and credits available to those who file jointly.

Qualified widow or widower

2023 standard deduction for qualified widow(er) filers: $27,700

It may seem pretty obvious who would qualify for this filing status, but the IRS has particular notes about what constitutes a qualified widow or widower. This tax filing status is for those who not only have lost a spouse but are also providing financial support for a child who lives at home.

The qualifying widow or widower status is unique in that you are only eligible for it for a set period. Although your personal situation might not change, the IRS only allows you to file as a widow or widower for a couple of years.

For instance, if your spouse passed away last year, you could file your taxes as married filing jointly for that tax year. In the two years following, you qualify to file as a widow or widower as long as you have a dependent living at home. This status exists for newly widowed individuals who are easing back into becoming single. By electing the widower filing status, you can still file as if you were married, which likely will keep your taxes lower than if you filed single.

I got divorced during the tax year. Which filing status should I choose?

If you went through a divorce, the IRS counts you as being unmarried for the entire year, even if your divorce wasn’t finalized until December. In this case, you should file your taxes as single for the year in which you got the divorce, unless you’re eligible for the head of household filing status or you remarry by the end of the year.

TaxAct makes tax filing easy

Once you pick your filing status, you can use intelligent tax software to actually file your tax return. Tax prep software like TaxAct® can help you figure out which tax filing status is best for you and can aid you in filing your return, making tax season as simple and painless as possible.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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How to Tell If You Are Self-Employed

If you’re a freelancer, it’s critical to know whether you’re self-employed or an employee. The distinction has a major effect on your tax responsibilities.

Categories of self-employed workers

You should consider tax and other factors when choosing a legal structure for your business.

Generally, the Internal Revenue Service (IRS) considers you to be self-employed if you fall into any of these categories of individuals who carry on a trade or business:

Sole proprietor: A “solo” is one person who owns an unincorporated business.

Limited Liability Company (LLC): An LLC combines some tax and other advantages of a corporation and a partnership. An LLC can consist of a sole member.

Independent contractor: Generally, you might be an independent contractor if you have the power to decide when, where, and how you work on a specific project. If you fall into this category, you might also refer to yourself as a freelancer.

Member of a partnership: A partnership is comprised of at least two people engaged in a business who share the profits and losses from that business.

Self-employed on a part-time basis

It’s important to understand you don’t have to work full-time in your business venture to be classified as self-employed. You might work for one employer, but you’re also self-employed performing tasks or services for several freelance clients. For example, you could be a project manager at a traditional 9-to-5 job with a side gig as a consultant or public speaker. In that case, you’d be both a traditional employee and self-employed.

Why it matters whether you’re self-employed

If you’re self-employed, your tax position is vastly different than a traditional employee’s. The major distinction is that self-employed individuals are responsible for paying their own taxes.

If you’re traditionally employed, your employer must withhold income tax and amounts for Medicare and Social Security from your paycheck. They are responsible for reporting and remitting those dollars to the tax authorities. When you work for yourself, those company responsibilities are now your own. This is called the self-employment tax.

Tax reporting

When you work for a traditional employer, they mail a Form W-2, Wage and Tax Statement, to any employee that earned at least $600 in wages at the end of the year.

However, when you freelance, the situation is a bit different. A freelance client sends a Form 1099-NEC, Nonemployee Compensation, to any freelancer who they paid at least $600 for a dedicated project or service.

Additionally, if you were paid via a payment card or third-party payment company (e.g., PayPal, Stripe, Square) for at least $20,000 and at least 200 transactions you should receive a Form 1099-K, Payment Card and Third Party Network Transactions, from each entity that met those thresholds.

NOTE: If a third-party payment company properly sends you a Form 1099-K, the freelance client should NOT also issue you a Form 1099-NEC. Otherwise, your income might be taxed twice.

Self-employed tax responsibilities

If you’re self-employed, you’re required to pay the IRS (and possibly state taxing authorities) directly. You don’t have an employer to take care of it for you.

In addition, you may be required to pay your taxes on a quarterly basis rather than annually on the mid-April filing date. That’s because the IRS expects you to pay the taxes you owe as you earn the money. To account for this, whenever you start working on a project, it’s a good idea to immediately determine how you should be classified in that particular work situation, then promptly pay your taxes if you’re self-employed. After all, as a business owner, you want to lessen the possibility of a stressful tax audit and concentrate instead on growing your business.

This article is for informational purposes only and not legal or financial advice.

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Understanding the 1099-NEC Form: A Complete Guide

If you’re new to being a self-employed taxpayer or you’ve hired an independent contractor for the first time recently, one of the first things you need to understand is the different tax forms you’ll be dealing with. In this article, we will focus specifically on IRS Form 1099-NEC, which details nonemployee compensation.

At a glance:

1099-NEC reports payments of at least $600 to nonemployees.
Nonemployee compensation used to be reported on Form 1099-MISC but now has its own separate form.
Payers should file Form 1099-NEC by Jan. 31 to avoid penalties.

What is IRS Form 1099-NEC, Nonemployee Compensation?

Form 1099-NEC, Nonemployee Compensation, is a tax form specifically designed to report payments made to those who aren’t considered employees. Freelancers, independent contractors, or those who are otherwise self-employed, may receive one or more 1099-NEC forms from clients detailing how much they were paid during the tax year. As a payer, you’ll need to file this form to comply with IRS rules. As a payee, you’ll need this form to correctly report your income when filing your income tax return.

Who needs a 1099-NEC form?

If you provide services as an independent contractor, freelancer, or self-employed individual during the year, your payers must send you a 1099-NEC form detailing your compensation if they paid you at least $600 during the year.

What is reported on a 1099-NEC form?

Nonemployee compensation refers to compensation paid to independent contractors who are not traditional employees. While employers will automatically withhold payroll taxes for employees, independent contractors will likely not have any taxes withheld from their pay. And if no tax is withheld from your pay, you’ll have to make those payments yourself each quarter.

Your 1099-NEC form simply reports the total amounts you were paid during the year from each payer. This form helps the IRS track income you receive outside traditional employee-employer relationships.

Here’s a breakdown of what information you’ll find on your 1099-NEC form:

The payer’s information: This is the information of the person who paid you. On the 1099-NEC, you’ll find their name, address, and taxpayer identification number (TIN), so you know who the 1099-NEC is from.
Your information: As the recipient, your name, address, and TIN will be on the 1099-NEC form as well. Your TIN can be your Social Security number (SSN) or your employer identification number (EIN).
Payment details:

Box 1: Here, you’ll be able to see your total nonemployee compensation.
Box 2: Your client will only check this box if they made direct sales totaling $5,000 or more of consumer products to you for resale.
Box 3: Box 3 is not used on 1099-NEC forms and should be grayed out.
Box 4: This box is for federal income tax withholding. If the payer collected any backup withholding from you, you’ll find that amount here.
Boxes 5-7: The IRS provides these boxes for convenience, but payers do not have to complete these sections, so they may be blank. If any state income tax was withheld, you’ll see that amount in box 5. Box 6 is for the state identification number, and box 7 records the amount of state income.

If you choose to file with us at TaxAct®, we can help walk you through reporting your 1099-NEC income on your federal and state income tax returns.

What’s the difference between a 1099-NEC form and a 1099-MISC form?

The 1099-NEC form is relatively new. Before its introduction, payers would instead report nonemployee income in box 7 on Form 1099-MISC.

While the 1099-NEC form focuses explicitly on reporting nonemployee compensation, the 1099-MISC covers a broader range of miscellaneous income types such as rent, royalties, prizes, awards, and other types of payments.

What is the reporting deadline for Form 1099-NEC?

Payers must file form 1099-NEC and send copies to recipients by Jan. 31 of the following tax year. This can be done by paper or electronic filing, and failing to meet the January due date can lead to penalties. Penalties for late or incorrect filing can be steep, ranging from $60 to $310 per form in 2023, depending on the duration of the delay and the negligence involved.

How to fill out a 1099-NEC form

Filling out an IRS 1099-NEC form as a payer involves several key steps to ensure accuracy:

First, gather essential information: your name, address, TIN, and the recipient’s details (name, address, TIN).
Next, enter the payment details in Box 1, recording the total amount paid to the recipient during the tax year for services rendered (if over $600). Make sure to report these accurately, as errors might trigger IRS inquiries.
In Box 4, input any backup withholding you withheld from the payment to the recipient, if applicable. You typically won’t need to fill out boxes 5-7 unless you withheld state taxes.

Once the form is completed, review it thoroughly for any errors or discrepancies before submission. Ensuring accuracy prevents potential issues with the IRS and avoids the need for corrections later.

Send Copy A to the IRS and give the recipient Copy B. Some state departments require that you send them a paper copy of the 1099-NEC form. If so, send Copy 1 to the state tax department.

To ensure an even smoother experience, try filing your 1099-NEC form electronically. The IRS allows you to e-file 1099 forms using their Information Returns Intake System (IRIS). This free service simplifies the filing process, allowing you to do so quickly and conveniently. You can request automatic extensions, and there is an option to bulk file. If necessary, you can also use this method to file corrected 1099-NEC forms.

The bottom line

The 1099-NEC form is vital for accurate reporting of nonemployee compensation. As a 1099-NEC payer or recipient, you should understand what gets reported on this tax form, the deadlines for filing it, and the importance of accuracy to mitigate any potential penalties and ensure a smooth tax-filing experience for everyone.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Understanding the 1099-NEC Form: A Complete Guide appeared first on TaxAct Blog.

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Capital Gains Tax Calculator

Use TaxAct’s capital gains tax calculator to estimate your potential capital gains taxes for the tax year.

At a glance:

Capital gains taxes apply to profits from selling stocks, Bitcoin, or large assets.
Capital gains can be short-term (sold within a year) or long-term (sold after a year).
Use our capital gains tax calculator to estimate your potential taxes.

If you sell stocks, Bitcoin, or a large asset (such as a car, home, or boat) for a profit, you may be on the hook to pay capital gains taxes on that income. Capital gains are broken into two categories based on the timing of their sale date. Short-term capital gains are assets sold less than a year from purchase. Long-term capital gains are assets sold more than a year from purchase.

Capital Gains Tax Calculator instructions

Part 1: Enter your personal details

Step 1: Select the tax year in which you sold the item(s).
Step 2: Select your tax filing status.
Step 3: Enter your taxable income excluding profits from asset sales. For most people, that is the same as your adjusted gross income (AGI).
Step 4: Enter your state’s tax rate.

Part 2: Detail each asset sale within the tax year

Step 1: Enter the purchase date and purchase price of the specific item. The purchase date can be any time up to Dec. 31 of the tax year selected.
Step 2: Enter the sale date and sale price of the same item. Make sure the sale date is within the tax year selected.
Step 3: Repeat for all asset sales within the tax year selected.

Capital Gains Tax Calculator

Frequently asked questions about capital gains

What are capital assets?

Any asset you own could be considered a capital asset. That includes your primary residence, cars, stocks, or bonds. There are some exceptions and exclusions such as home sales.  Couples that sell a home are excluded from paying capital gains tax on up to $500,000 in profit. Individuals can exclude up to $250,000.

What are capital gains?

When you sell an asset for a profit, that profit is generally defined as a capital gain. Conversely, selling an asset for a loss is known as a capital loss.

What is the difference between short-term and long-term capital gains?

As briefly mentioned above, the difference between a short-term and long-term capital gain is the amount of time between the purchase and the sale dates. Another way to look at it is the amount of time the asset was held by the owner.

Short-term capital gains include the profits on any assets sold one year or less from the original purchase date.
Long-term capital gains include the profits of assets or investments sold beyond one year of the original purchase date.

What happens if you have a mix of capital gains and capital losses?

When calculating capital gains taxes, you should first evaluate all short-term and long-term transactions separately.  For transactions within a given tax year, here’s a simplified version of how to start:

 Add all long-term gains and subtract all long-term capital losses.
 Add all short-term gains, and subtract all short-term capital losses.
If both long-term and short-term capital gains are positive, evaluate each separately against relevant tax rates.
If both long-term and short-term capital gains are negative, your capital gains tax is $0.
If the sum of your long-term and short-term gains is 0, your capital gains tax is $0.
If one of your long-term or short-term gains is positive while the other is negative, subtract the negative from the positive. Next, evaluate the capital gains tax on the remaining amount. For example, if your long-term gains are $1,000, and your short-term losses are -$500, you should subtract the loss from the long-term profit. Then, you can calculate the long-term capital gains tax on the remaining $500.

Capital gains tax tables

Like income tax brackets, capital gains tax brackets can be confusing and easily misunderstood.  And, under tax reform that went into effect in 2018, they were significantly adjusted in the past few years. Refer to the tables below to estimate your capital gains taxes.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

More to explore:

The Complete Definition of Capital Gains Tax
Turn Your Big Money Ambitions into Manageable Micro Goals
When Does Capital Gains Tax Apply?
5 Capital Gains Mistakes that Could Cost You

The post Capital Gains Tax Calculator appeared first on TaxAct Blog.

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Online Seller 1099-K FAQs and Scenarios Explained

Updated for tax year 2023.

You’ve likely heard about the new IRS reporting thresholds for Form 1099-K that were supposed to go into effect during the 2023 tax year. As of November 2023, the IRS has postponed the threshold changes once again, and you will only receive Form 1099-K for 2023 if you hit an annual threshold of $20,000 in gross payments and at least 200 transactions.

In 2024, the $20,000 threshold will be lowered to $5,000 with no transaction minimum. This is part of a phase-in process by the IRS to eventually implement a $600 reporting threshold in 2025 unless the IRS makes more changes.

We know these changes and postponements can be confusing, especially when it comes to selling items online. To help you understand, let’s look at some common concerns we see from online sellers and how to handle certain unique situations, like selling inherited items.

How to calculate your taxable income from an online sale

You only owe income tax on the net profits you make from a sale. To determine your profits, you need to keep track of each item’s sale price and any other expenses related to the sale.

If you are a casual seller (not a business) and you sell a personal item for more than you originally paid, the profit you make is considered a capital gain. Capital gains are taxable income and must be reported on your tax return using Schedule D.

To determine your taxable gains when selling personal assets, you will need this formula:

Sale Price (what you sold the item for) – Cost Basis (what you paid for the product + any fees associated with the sale of the item) = Capital Gain (income reported on Schedule D)

Capital gains are taxed at different rates depending on how long you hold the item before selling it. If you held the item for a year or less, it’s a short-term capital gain taxed as ordinary income. If you held the item for longer than one year, it’s considered a long-term capital gain. Long-term gains are taxed at capital gains tax rates, which are usually more favorable than ordinary income tax rates.

If you’re someone who learns best from examples, we will go over some capital gains calculation scenarios farther down. First, let’s learn how to calculate your cost basis and what kind of documentation you need to keep just in case the IRS has questions for you.

How to determine your cost basis

To determine your item’s cost basis, you’ll need to know what you originally paid for the item and have some kind of proof to show the IRS in case they ask for it. Typically, your proof would be a receipt or other documented proof of what you paid for the item.

How do I determine my cost basis without a receipt?

If you acquired an item long ago and no longer have the receipt, there are other ways to prove your cost basis. Look for invoices, statements, written communications, purchase history in retail apps, even before-and-after photos of the item that can show any differences or improvements made since acquiring it. For instance, if you bought the item new and later sold it in used condition, photos of the item in its original condition can help you determine your cost basis in relation to its purchase price (and vice versa).

When substantiating your cost basis for an item, anything is better than nothing. There is not one specific method you must use when keeping records, but try your best to find some kind of substantial proof just in case the IRS decides to question you.

What if I can’t find documents showing what I originally paid for the item?

If you can’t provide proof of your cost basis, the IRS could argue that your basis is $0 and require you to report the item’s entire sale price as a gain.

If you estimate your cost basis to calculate any potential gains but have no proof to back up your estimate, the IRS could choose to deny your calculation and require you to pay taxes on a larger gain. Just know that guesstimates should be your last resort, and you should strive to find something substantial to back up your cost basis claims if you can.

Profitable item scenario:

To break it down, let’s look at an example of a profitable online sale.

You buy a used piece of furniture at a thrift store for $100. You bring it home and spend some money to fix it up. A few years later, you decide to redecorate and sell the restored piece of furniture online for $700. The payment platform takes $90 in seller fees, and the buyer pays for shipping.

To calculate your taxable gain, you would take your final sale price minus your cost basis (the original price you paid plus any fees related to the sale of the item):

$700 (sale price) – $190 (the original price + fees) = $510 (capital gain)

Since the buyer paid for shipping, you’d be left with a net profit of $510, and you’d report that income as a capital gain on your tax return.

As you can see from this example, certain expenses can be added to your cost basis to lower your gain. If you’re a hobby seller, you can lower your gain by subtracting seller fees paid to the online marketplace. However, the IRS does not let you deduct hobby expenses, like the cost of restoring the furniture or any costs related to shipping the item.

If you are selling as a business, you have more deductible expenses, which can reduce your taxable income. Any profits you make when selling as a business are considered business income and reported using Schedule C.

How to know when a sale isn’t taxable

If you sold an item at a net loss against its original cost basis, there is no gain to report — instead, you’d report it as a loss and will not be responsible for any income taxes on the sale.

Unprofitable item scenario:

You are having a “virtual garage sale” online and selling personal items you no longer use. One of the items you are selling is an old gaming console. You originally bought the console in new condition several years ago for $300, and you sold it online in 2023 for $50.

Since you sold the item for less than your original cost basis ($300), you do not need to pay any income taxes on the $50 you received from the sale. You’ll report the sale as a loss using Schedule 1 or Schedule D on your tax return, but it will amount to $0 in taxable gains.

Unique scenarios: Inherited items

Certain types of items come with their own special rules. One of the more common ones is how to price and calculate profits when selling inherited items.

How do I determine the cost basis of items I have inherited?

The cost basis of inherited assets is typically determined at the time of inheritance using fair market value (FMV). Fair market value is the current value of your item in an open market.

When calculating your cost basis using FMV, make sure you consider the item’s condition when it was inherited. If you cannot easily determine the fair market value of an item by looking at comparable sales of similar items, it might be best to get an expert appraisal.

Can I just use the value of a similar item sold online to determine the inherited item’s worth?

Yes, this is an acceptable way to determine the fair market value for most items. You can research what other people are paying for the same item in a similar condition and use that information to reasonably determine your item’s fair market value.

What proof do I need to keep for fair market value substantiation in this instance?

There is no “one size fits all” in keeping records. When you research the FMV of an item, you can record proof by getting an expert appraisal, taking a screenshot of what similar items are selling for online, creating a PDF, printing out the page — whatever method works best for you. Make sure to also record the date of the screenshots, printouts, or another form of proof for context. The method doesn’t matter as long as you have some proof in case the IRS asks for it.

Can I use the amount I sold the inherited item for to determine its FMV?

The IRS typically will not accept the item’s final sale price as proof of fair market value. As mentioned above, you should ideally have either an appraisal or recorded proof of similar items sold for the same price to substantiate how you determined the FMV at the time of inheritance.

Inherited item scenario:

Now let’s look at an example. Say you inherited an antique from a relative upon their death in 2020. You had the item appraised, showing that the item’s fair market value at the relative’s time of death was $3,000. You sell the item online in 2023 for $3,800 and pay $50 in shipping costs. You also pay the online marketplace $490.50 in seller fees.

Here’s how you would determine your taxable income on the inherited item:

$3,800 (sale price) – $3,000 (fair market value at time of inheritance) – $490.50 (seller fees) = $309.50 gain

You’d report $309.50 as taxable income when filing your 2023 tax return. Because you are not selling as a business, you would be unable to deduct the $50 you spent on shipping the item.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions 

The post Online Seller 1099-K FAQs and Scenarios Explained appeared first on TaxAct Blog.

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4 Common Misconceptions About Form 1099-K

Updated for tax year 2023.

If the new 1099-K reporting thresholds have you confused as an eBay seller, you’re not alone. But don’t worry — eBay and TaxAct® have partnered up to help you separate fact from fiction.

Below we’ll address some common misconceptions you might have heard about these changes and the truth about how your taxes could be affected.

Misconception 1: This is a new tax that I will have to pay on my profits.

The truth: This change is not a new tax imposed on online sellers but a new reporting requirement for eBay and other online marketplaces. Any income derived from a sale has always been reportable income for eBay sellers.

Previously, and continuing for 2023, you will only receive Form 1099-K from eBay if you hit $20,000 in gross payments and 200 transactions annually (the only exceptions would be if your state has a lower threshold or you were subject to backup withholding). The IRS has lowered this threshold for tax year 2024, meaning eBay and other marketplaces must report gross sales that equal or exceed $5,000 on a Form 1099-K beginning in tax year 2024.  This is part of a phase-in process by the IRS to eventually implement a $600 threshold in 2025.

Due to these changes, many sellers who have not received a Form 1099-K before will begin receiving the form in the coming tax years. eBay and TaxAct have partnered to help you understand the changes and how to report them on your income tax returns.

Misconception 2: All the transactions on my 1099-K are taxable.

The truth: Receiving a Form 1099-K doesn’t automatically mean you’ll owe income tax on the gross sales amount reported to you. You are taxed on your net income, but a 1099-K only shows your gross receipts. The amounts reported on Form 1099-K do not consider your cost basis and any adjustments for fees, refunds, credits, etc.

If you sold an item at a net loss against its original cost basis, you should report it as a loss on Schedule 1 or Schedule D. You will not be responsible for any income taxes on the sale.

When filing your tax return, use your Form 1099-K as an informational document to help you fill out Schedule C to report business profit and losses (if you are a sole proprietor) or Schedule D to report capital gains and losses (if you are a casual seller). Then make any necessary adjustments to make your tax return consistent with your own records. That’s why good bookkeeping is key.

Misconception 3: I’m only a casual seller, not a business, so I don’t need to report my sales profits as income.

The truth: Taxable income includes any income made from sales, whether you’re a casual seller, hobby seller, or a business.

For example, let’s say your hobby is thrifting old pieces of furniture, and sometimes you flip them for a profit. Last year, you bought a used piece of furniture for $100, restored it, and sold it on eBay for $700. This gives you a $600 profit. Unlike a business, as a hobby seller, you cannot deduct expenses incurred before the sale, such as the cost of restoring the furniture, but expenses on the actual sale (like any eBay fees) can be added to your cost basis to reduce your gain.

If casual selling becomes a regular profitable occurrence, the IRS may start to consider your hobby to be a formal business. Turning your hobby into a business could make you eligible for certain business tax deductions.

You can check the IRS’s guidelines for determining when a hobby becomes a business here. If you have questions about the differences between hobby selling and business selling, TaxAct Xpert Assist℠ 1 is an add-on feature that allows you to connect with a tax expert and get your questions answered in real time.

Misconception 4: I will be paying tax on all items I sell, even if it’s at a loss.

The truth: Income is determined by deducting expenses from the final sale price and determining if the transaction yielded a profit or a loss. Only the profit is considered taxable income, so you won’t owe any taxes on something you sell at a loss or for less than what you paid. We may sound like a broken record here, but for this reason, be sure to practice good bookkeeping for your taxable and nontaxable sales as an online seller.

We’ll look at a nontaxable transaction this time. Imagine you bought a new bike for $1,000 last year and then sold it on eBay for $700 this year. Because you sold the bike at a loss, there would be no income to be recognized on this sale even though the transaction may be reported on the 1099-K you received from eBay. Instead of reporting the sale as income, you would report it as a loss using either Schedule 1 or Schedule D.

For more information about how to report capital asset gains and losses on your tax return, check out our comprehensive guide to capital gains taxes.

The bottom line

While the 1099-K changes this year may be confusing for casual sellers and small businesses who have never seen this form before, TaxAct and eBay are doing our best to keep you and other sellers informed and prepared for next tax season.

In the meantime, eBay is advocating for their online sellers by fighting this legislation on your behalf. You can learn more about eBay’s efforts by checking out eBay Main Street.

eBay and its affiliates do not provide legal, tax, or accounting advice. This material is being provided for informational purposes only and is not intended as, and should not be relied upon for, legal, tax, accounting, or other professional advice. Please consult your own legal, tax, and accounting advisors for advice specific to your situation

1TaxAct Xpert Assist is available as an added service to certain users of TaxAct’s online, consumer prepared 1040 product. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. View full TaxAct Xpert Assist Terms and Conditions.

All TaxAct offers, products and services are subject to applicable terms and conditions.

IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.

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eBay Seller FAQs and Unique Scenarios Explained

Updated for tax year 2023.

You’ve likely heard about the new IRS reporting thresholds for Form 1099-K that were supposed to go into effect during the 2023 tax year. As of November 2023, the IRS has postponed the threshold changes once again, and you will only receive Form 1099-K for 2023 if you hit an annual threshold of $20,000 in gross payments and at least 200 transactions.

In 2024, the $20,000 threshold will be lowered to $5,000 with no transaction minimum. This is part of a phase-in process by the IRS to eventually implement a $600 reporting threshold in 2025 unless the IRS makes more changes.

We know these changes and postponements can be confusing, especially when it comes to selling items online. To help you understand, let’s look at some common concerns we see from online sellers and how to handle certain unique situations, like selling inherited items.

How to calculate your taxable income from an online sale

You only owe income tax on the net profits you make from a sale. To determine your profits, you need to keep track of each item’s sale price and any other expenses related to the sale.

If you are a casual seller (not a business) and you sell a personal item for more than you originally paid, the profit you make is considered a capital gain. Capital gains are taxable income and must be reported on your tax return using Schedule D.

To determine your taxable gains when selling personal assets, you will need this formula:

Sale Price (what you sold the item for) – Cost Basis (what you paid for the product + any fees associated with the sale of the item) = Capital Gain (income reported on Schedule D)

Capital gains are taxed at different rates depending on how long you hold the item before selling it. If you held the item for a year or less, it’s a short-term capital gain taxed as ordinary income. If you held the item for longer than one year, it’s considered a long-term capital gain. Long-term gains are taxed at capital gains tax rates, which are usually more favorable than ordinary income tax rates.

If you’re someone who learns best from examples, we will go over some capital gains calculation scenarios farther down. First, let’s learn how to calculate your cost basis and what kind of documentation you need to keep just in case the IRS has questions for you.

How to determine your cost basis

To determine your item’s cost basis, you’ll need to know what you originally paid for the item and have some kind of proof to show the IRS in case they ask for it. Typically, your proof would be a receipt or other documented proof of what you paid for the item.

How do I determine my cost basis without a receipt?

If you acquired an item long ago and no longer have the receipt, there are other ways to prove your cost basis. Look for invoices, statements, written communications, purchase history in retail apps, even before-and-after photos of the item that can show any differences or improvements made since acquiring it. For instance, if you bought the item new and later sold it in used condition, photos of the item in its original condition can help you determine your cost basis in relation to its purchase price (and vice versa).

When substantiating your cost basis for an item, anything is better than nothing. There is not one specific method you must use when keeping records, but try your best to find some kind of substantial proof just in case the IRS decides to question you.

What if I can’t find documents showing what I originally paid for the item?

If you can’t provide proof of your cost basis, the IRS could argue that your basis is $0 and require you to report the item’s entire sale price as a gain.

If you estimate your cost basis to calculate any potential gains but have no proof to back up your estimate, the IRS could choose to deny your calculation and require you to pay taxes on a larger gain. Just know that guesstimates should be your last resort, and you should strive to find something substantial to back up your cost basis claims if you can.

Profitable item scenario:

To break it down, let’s look at an example of a profitable online sale.

You buy a used piece of furniture at a thrift store for $100. You bring it home and spend some money to fix it up. A few years later, you decide to redecorate and sell the restored piece of furniture on eBay for $700. eBay takes $90 in seller fees, and the buyer pays for shipping.

To calculate your taxable gain, you would take your final sale price minus your cost basis (the original price you paid plus any fees related to the sale of the item):

$700 (sale price) – $190 (the original price + eBay fees) = $510 (capital gain)

Since the buyer paid for shipping, you’d be left with a net profit of $510, and you’d report that income as a capital gain on your tax return.

As you can see from this example, certain expenses can be added to your cost basis to lower your gain. If you’re a hobby seller, you can lower your gain by subtracting seller fees paid to eBay. However, the IRS does not let you deduct hobby expenses, like the cost of restoring the furniture or any costs related to shipping the item.

If you are selling as a business, you have more deductible expenses, which can reduce your taxable income. Any profits you make when selling as a business are considered business income and reported using Schedule C.

How to know when a sale isn’t taxable

If you sold an item at a net loss against its original cost basis, there is no gain to report — instead, you’d report it as a loss and will not be responsible for any income taxes on the sale.

Unprofitable item scenario:

You are having a “virtual garage sale” on eBay and selling personal items you no longer use. One of the items you are selling is an old gaming console. You originally bought the console in new condition several years ago for $300, and you sold it on eBay in 2023 for $50.

Since you sold the item for less than your original cost basis ($300), you do not need to pay any income taxes on the $50 you received from the sale. You’ll report the sale as a loss using Schedule 1 or Schedule D on your tax return, but it will amount to $0 in taxable gains.

Unique scenarios: Inherited items

Certain types of items come with their own special rules. One of the more common ones is how to price and calculate profits when selling inherited items.

How do I determine the cost basis of items I have inherited?

The cost basis of inherited assets is typically determined at the time of inheritance using fair market value (FMV). Fair market value is the current value of your item in an open market.

When calculating your cost basis using FMV, make sure you consider the item’s condition when it was inherited. If you cannot easily determine the fair market value of an item by looking at comparable sales of similar items, it might be best to get an expert appraisal.

Can I just use the value of a similar item sold on eBay or another site to determine the inherited item’s worth?

Yes, this is an acceptable way to determine the fair market value for most items. You can research what other people are paying for the same item in a similar condition and use that information to reasonably determine your item’s fair market value.

What proof do I need to keep for fair market value substantiation in this instance?

There is no “one size fits all” in keeping records. When you research the FMV of an item, you can record proof by getting an expert appraisal, taking a screenshot of what similar items are selling for online, creating a PDF, printing out the page — whatever method works best for you. Make sure to also record the date of the screenshots, printouts, or another form of proof for context. The method doesn’t matter as long as you have some proof in case the IRS asks for it.

Can I use the amount I sold the inherited item for to determine its FMV?

The IRS typically will not accept the item’s final sale price as proof of fair market value. As mentioned above, you should ideally have either an appraisal or recorded proof of similar items sold for the same price to substantiate how you determined the FMV at the time of inheritance.

Inherited item scenario:

Now let’s look at an example. Say you inherited an antique from a relative upon their death in 2020. You had the item appraised, showing that the item’s fair market value at the relative’s time of death was $3,000. You sell the item on eBay in 2023 for $3,800 and pay $50 in shipping costs. You also pay eBay $490.50 in seller fees.

Here’s how you would determine your taxable income on the inherited item:

$3,800 (sale price) – $3,000 (fair market value at time of inheritance) – $490.50 (seller fees) = $309.50 gain

You’d report $309.50 as taxable income when filing your 2023 tax return. Because you are not selling as a business, you would be unable to deduct the $50 you spent on shipping the item.

eBay and its affiliates do not provide legal, tax, or accounting advice. This material is being provided for informational purposes only and is not intended as, and should not be relied upon for, legal, tax, accounting, or other professional advice. Please consult your own legal, tax, and accounting advisors for advice specific to your situation.

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