By Louis DeNicola
Generally, people know income from a job, interest on a savings account and capital gains on investments are taxable. However, you may not realize that other sources, including, for example, income from a hobby or prizes, could also be subject to federal income tax.
Line 21 of the federal income tax Form 1040 is where you'll list "other income," a broad category that can be confusing for tax filers.
Here’s what this article will cover:
1. What’s line 21 on Form 1040?
2. What documents and information do you need to complete line 21?
3. What are examples of income you need to report on line 21?
4. What doesn’t qualify as other income?
Depending on your tax situation, you can use one of three forms (1040, 1040A or 1040EZ) to file a federal income tax return. Form 1040 is the longest and most comprehensive version, while 1040A and 1040EZ are shortened versions for taxpayers who have less complex tax situations meeting the specifications for each form.
"Form 1040 has specific lines for reporting wages, interest and dividends," says Benjamin Sullivan, an Enrolled Agent and Certified Financial Planner™ at the Palisades Hudson Financial Group in Austin, Texas.
After calculating your other income, if you have any, you'll add the sum of lines 7 through 21 to determine your total income — line 22.
While that number could be higher than you expect, you still need to consider adjustments, deductions and tax credits to determine your tax payment or return for the year. That comes later in the 1040 form.
You might receive a tax form from a payer, such as a Form W-2G (for certain gambling winnings), with earnings that you'll report on line 21.
However, there are instances when you're required to report "other income" based on your personal records — say, if you made money from a hobby – for which you won’t receive a form. So whether you receive a form for income or not, you’re still required to report that income.
In either case, you’re required to enter the type and amount, per the form instructions and form itself. If you have “other income” from multiple sources, you can attach a supporting document, such as a spreadsheet, listing each source and the related amount.
There are many types of taxable income that you may have to list on line 21, which generally include (but aren’t limited to):
- Prizes and awards. The cash amount or cash value of a prize or awards you won, including winnings from games shows, contests and drawings.
- Gambling winnings. Your winnings from lotteries, raffles, casino games and other forms of gambling. You might receive a W-2G that lists your gambling winnings for the year, but you’re required to report the winnings even if you don’t receive a W-2G.
- Jury duty pay. You'll only receive a 1099-MISC showing your jury duty pay if you earned more than $600. Even when you aren't sent a form, you're required to list the payments on line 21.
- Income from a hobby. Earnings from a hobby, generally an activity you don't engage in to make a profit. You may be able to list hobby-related expenses as itemized deductions on Schedule A.
- Alaska Permanent Fund dividends. An annual payment made to qualified Alaskan residents.
- Nonbusiness rentals. If you rented property or equipment, such as an expensive tool or your vehicle to a friend, and don't have a formal rental business, you might need to include the income on line 21.
- Taxable health savings account (HSA) or Archer MSA distributions. Distributions that were more than an unreimbursed qualified medical expense and weren’t included in a qualified rollover may be taxable income. You may also be subject to an additional tax if you receive a taxable distribution from an HSA or Archer MSA (see the Instructions for IRS Form 8889 for HSAs and Form 8853 for Archer MSAs).
- Taxable distributions from Coverdell education savings accounts (ESAs) or qualified tuition programs (QTPs). The distributions could be taxable if they weren't included in a qualified rollover or are more than the qualified higher education expenses for the beneficiary. You may also be subject to an additional tax if you receive a taxable distribution from an ESA or a QTP (see the Instructions for IRS Form 5329).
- Canceled nonbusiness debt. If one of your nonbusiness debts is forgiven, canceled or settled for less than the amount owed, the canceled amount could be taxable income. You might get a Form 1099-C that lists the canceled amount if it's more than $600. For example, if you settle $4,000 worth of credit card debt with a debt collector for $2,000, the remaining $2,000 may be considered other income. However, some canceled debt is nontaxable.
Dave Du Val, EA, Chief Customer Advocacy Officer at TaxAudit.com, shared several more complex cases, including certain types of reimbursements.
He notes that any amounts you received for items deducted in an earlier year — such as medical expenses, real estate taxes or home mortgage interest — are taxable in the year the reimbursement is received.
Du Val also pointed out that nonemployee compensation, reported on Form 1099-MISC, could fall onto line 21 if it isn't subject to self-employment tax (that would get reported on a Schedule C).
He says nonemployee compensation could include, but isn’t limited to:
- Income you earned as an executor or administrator of an estate.
- Certain commissions paid to retired insurance agents.
- Incentive payments from auto manufacturers to salespersons.
While your tax preparer or tax preparation software will try to classify your income correctly, mistakes could happen.
Grafton Willey, CPA, a managing director at CBIZ MHM's Providence, Rhode Island, office says confusions can arise because "occasionally items might appear to be taxable that actually aren't."
For example, an insurance refund or rebate might not be taxable if your initial payment wasn't deductible. "Proceeds from life insurance are also generally not taxable, although some might be," Willey says.
If you're faced with unusual or confusing situations, experts, including Willey, recommend working with an experienced tax professional.
About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.
Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!