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Taxes..."almost" done

February 10th, 2018 at 05:41 pm

I started working on my taxes around mid-afternoon and, 5 hours later, I am "almost" done.

The little glitch I ran into was how to report Miscellaneous Income reported to me by a gallery that sold some of my mother's work. It appeared to be a choice between lumping it in with my freelance income or putting it on Line 21 ("Other Income").

Dido very kindly advised me that it would be better to put it on Line 21 (Other Income); if it was added to my self-employment income, it would increase my self-employment taxes by an additional $200 or so.

Anyway, I'll have to wait til Tuesday to contact the gallery and see if they would be willing to amend the 1099 MISC form by putting the income under another box. Seems reasonable, and I'm hoping they will do it.

I decided to assume they would do this and forged ahead with my return. I was happily surprised to see that I overpaid my taxes and should get a $1484 refund.

Given my hodgepodge of income sources last year (2 W-2 contract jobs, 4 months of freelance work, the above-mentioned art gallery sales, taxable interest and dividends and some unemployment compensation, it was impossible to accurately predict what I'd owe. I did also make some quarterly estimated tax payments for the 4 months of freelance work, and I see now I could have skipped that entirely and still not owe anything.

I am hoping 2018 will be more straightforward.

If it turns out on Tuesday that the gallery won't amend that form, my refund will still be about $1200 and I will just need to redo the SE form and then recalculate on the 1040 form from Line 57 onward.

Once I determine that, I'll proceed with filing my federal return and then begin work on my state return. That one should be in decent shape because I also made quarterly estimated payments for the state when I did the federal tax payments.

So while my AGI was over $45K (that's before itemized deductions of over $11K), my taxable income came out to just $30,418 and my total tax was $3,986. So does that mean my personal tax rate was 13%?

I think I'd also better follow up next week with my benefit administrator, as the form they issued me indicating my health insurance coverage was wrong, stating I had insurance for 11 months of the year when in fact I had it for all 12 months. I talked to them a few weeks ago and she left me a message saying they'd amend the form.

Oh, feeling relief. I hate filing my taxes but would still rather save the money and do it myself. It's just a real burden and I try to do it as soon as possible each year. I also really try to avoid freelance work because I hate filing the extra forms for that.

10 Responses to “Taxes..."almost" done”

  1. AnotherReader Says:

    I don't understand why you should owe any taxes on the sale. You did not earn income, you sold an asset. When you inherited the art, it had a value, which should have been its' new basis. When you sold it, any difference between the value on the date of death and on the sale date should have been a short or long term capital gain. I would guess the gain is zero or close to it.

    The gallery is giving you a form that would apply if you were the artist, selling a product of your labor. It seems like this is no different from selling household goods or the condo.

  2. Dido Says:

    Inheriting self-produced art not necessarily like inheriting purchased art or other property. Sec 1221 (a)(3)(C) would seem to apply. Ordinary income not cap gain, but should be box 3 not 7 on the 1099.

  3. AnotherReader Says:

    I suggest discussing this with a knowledgeable tax professional, a CPA with some experience filing returns for inheritors. Dido may be right, but I would want a professional in the tax field that is licensed to interpret IRS regulations and rulings to verify this.

  4. Joe Says:

    Effective tax rate is calculated on AGI. $3986/$45,000 = 8.86%

  5. Dido Says:

    Never hurts to confirm, but just a note, I am a CPA. And I did note appropriate cautions to PS in our private correspondence.

    Joe is right that effective tax is most commonly calculated as total tax over AGI, but you will cases in practice in which it is calculated as total tax over total income and others where it is calculated as total tax over taxable income. Even the different professional tax preparation software does not all use the same definition (I've worked with at least half a dozen tax prep packages).

    When you have self-employment income, the ratio gets a bit distorted by the SE tax--it's referring to the average rate you are paying on your earned income. And since you're including the payroll taxes in there, it's higher. For the purpose of thinking in general about how much of your income is going to tax, use either total tax or AGI in the denominator.

  6. AnotherReader Says:

    Off topic, but I am curious how the IRS views self-created art for estate tax purposes. Is it not taxed as part of the estate? What happens to the income with respect to the decedent when the art is sold (in the inheritor's hands at that point) in this case?

  7. rob62521 Says:

    Hope you can get the taxes completed. Very frustrating with all these tax laws.

  8. Jenn Says:

    I don't think the IRS is out to get people with good motives that make an honest mistake on the return. I would do what you think is right and let it go ( as you're doing). Hiring a tax professional would likely cost more than it's worth in your case and add stress as well.

    The worst that could happen is that you get audited and a mistake was made. It could cost you a few bucks - big deal. I saw an entry on another financial blog about the 'fear tax' - a tax people impose on themselves because they're not 100% sure that they qualify for a deduction so they don't take it.

  9. Dido Says:

    Dug a bit further. Another Reader is right, she can qualify for cap gains treatment as section 1014 does trump section 1221(a)(3)(C) in this area.

    No more time to spend on this but perhaps this article, where I found the citation to Section 1014 will answer your questions https://wyattwillsandtrusts.com/tag/intellectual-property-capital-asset-negative-basis/

    There is definitely controversy in this area, a lot of court cases and Private Letter Rulings. The case of Jean-Michel Basquiat is quite interesting! https://www.dnainfo.com/new-york/20130905/boerum-hill/jean-michel-basquiats-dad-leaves-behind-sons-art-tax-problem

  10. Dido Says:

    "Fear tax" is a great term!

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