I have a friend who inherited many electronic items including those of the audiophile variety. Through ads on this site and others, he sold about $60k worth of equipment within this year. He is not a dealer and does not have a business, either physically or on paper. Most of the payment transactions were made through PayPal. He is now worried about potential tax liability. Sometimes he created invoices. Sometimes the money was sent through PayPal's "Friends and Family" option. The money was transferred from PayPal to his bank account periodically. It suddenly occurred to him about possibly having a tax liability. Made me curious too. Would these proceeds need to be declared as income to the IRS?
Here is your $5 answer... I'll echo warmglowtubeart.
See Internal Revenue Code § 102 Gifts and Inheritances:
General Rule – Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. .... See also Income Tax Regulation 1.102-1 Gifts and Inheritances.
Jea48 posted: "If I remember correctly EBay... was forced by the IRS to send out a 1099-K to sellers..." I suppose you could say that if the IRS informed eBay they should start following the law like they should, that you could say they were forced. That's also why policemen have guns (in the USA). Governments come in two types: those who assert the right to use superior force, and governments whose members are in jail, in exile, or in graves! I received a 1099 from Paypal one year a few years ago. I made sure I deducted Paypal fees (banking fees), shipping costs (postage and packing), original costs, etc. etc. I was just following the law ; ) !! There is also a simplified calculating method for such issues; I think you can deduct 1/3 of "hobby" sales. IANAL, but my opinion is this is an inheritance issue. (I gotta go take my meds now).
Yes, of course he should timely file the return, and inform his preparer regarding this situation. Either he or his representative will need to find out what the fair market value of the electronics/audio equipment claimed on the Estate return (due 6 months after the date of death ) was. That number will be his basis for purposes of determining whether there was a capital gain, loss or "wash" from sales of the electronics (most probably a loss or a wash).
"It is much easier to be critical than to be correct." --Benjamin Disraeli
... In my view, there is nothing that should be done in this situation
unless and until the taxpayer receives a letter of inquiry or Notice of
Audit....
If a taxpayer or representative were to contact the I.R.S. about a
filed return first, say to explain a Form 1099, their chances of being
audited would only go up, thereby asking for "trouble".
Steve (Warmglowingtubesart), thanks very much for your informative posts. But note in the OP the indication that the items were sold "within this year." So presumably what is being looked for is guidance about how the sale proceeds should be treated when the 2016 return is prepared a few months from now. (And perhaps also if a final quarterly estimated tax payment for 2016 will be submitted).
"AND"...... Capital letters too, and I still missed it.
PayPal is required to report gross payments received for sellers who receive over $20,000 in gross payment volume AND over 200 separate payments in a calendar year.
cleeds-- If it makes the taxpayer feel better, then he should go ahead and consult someone. But, in my view, there is nothing that should be done in this situation unless and until the taxpayer receives a letter of inquiry or Notice of Audit. Less than 1% of all tax returns are actually audited, and the I.R.S. must complete an audit (and send you a "statutory notice of deficiency") before they can legally make an assessment against you (in excess of the amount you showed as tax due on your return). Until there is an assessment,no collection efforts (such as levying on a bank account or garnishing your wages, for example) can be undertaken. If a taxpayer or representative were to contact the I.R.S. about a filed return first, say to explain a Form 1099, their chances of being audited would only go up, thereby asking for "trouble". Also, once a statutory notice of deficiency is issued, the taxpayer has 90 days to file a petition in the Tax Court. Throughout the time the case is pending in court, no collection activities can be taken. Also, the taxpayer will be contacted via letter by a local Appeals Office early in the process, in an attempt to resolve the matter without going to trial. I would say to sit tight for now, and in the unlikely event of an audit, hire a tax attorney or C.P.A. at that time. I would also point out that the I.R.S. never contacts taxpayers by telephone, unless they are returning a call from the taxpayer. It just doesn't work that way. Thus, if someone calls you purporting to be from the I.R S., you can be sure that the caller is a fraud, probably trying to get personal information about you.
Jim (Jea48), thanks for providing the links. From the wording of your posts, though, I'm not sure if you've noticed that the requirement for issuance of a 1099-K is $20,000 **and** (not "or") 200 separate payments in a calendar year.
If I remember correctly EBay/PayPal, (EBay at the time owned PayPal), was forced by the IRS to send out a 1099-K to sellers that sold items that totaled over $20,000 or 200 transactions in a calendar year period. More importantly A 1099-K had to be sent to the IRS. Problem was the number of people that did not have an actual business on file with the state and or local governing body. They didn’t have a state sales tax permit or a federal ID number for the business. Why would the state let alone the IRS worry about some guy running a small business out of his home? The government wasn’t getting their piece of the pie. With the 1099-K not only do they get their due income tax and state/local sales tax money they know who might be running a business under the radar of the IRS, state, and local government. It’s all about getting their piece of the pie.
As for the OP’s friend I would be willing to bet he will get a 1099-K from PayPal. PayPal knows nothing about where the guy got the merchandise he listed on EBay that sold for over $60,000 so far this year. He will then have to pay the person who prepares his taxes to straighten out the mess with the IRS. One thing for sure I wouldn’t just throw the 1099-K in the garbage can when it comes.
This
is getting very repetitive. In the unlikely event that you receive an
inquiry from the I.R.S., or a Notice of Audit, you should hire a tax
attorney or C.P.A. at that time. Period.
It's easier to get professional advice before you're in trouble than to seek it afterwards. It's cheaper, too.
This is getting very repetitive. In the unlikely event that you receive an inquiry from the I.R.S., or a Notice of Audit, you should hire a tax attorney or C.P.A. at that time. Period.
To be precise, again, I should add one more point regarding the fact that there is no Federal Inheritance Tax. Although heirs don’t have to pay Federal tax on what they receive from the decedent’s assets as they existed on the date of death, under many circumstances heirs may have to pay tax on whatever share they receive of income that may be earned by the estate subsequent to the decedent’s passing. That falls under what is known as the Estate Income Tax (for which the executor files Form 1041 if necessary, and it often will be necessary since the filing threshold is $600), as opposed to the Estate Tax (for which the executor files Form 706 if necessary, and it rarely will be necessary since the filing threshold is $5.45 million) :-)
Do you live in NE, IA, KY, PA, NJ or DE? If not, then you’re good. NJ officially killed it’s Inheritance/Estate tax on November 1, 2016. It’s real easy to find out, just Google "inheritance tax (state)"
No, NJ has not ended the inheritance tax. You’re completely mistaken. The state did repeal the estate tax. But the estate tax and the inheritance tax are two different things.
If you sell an item for more than the appraised value, or last purchase value, then you are required to pay Income Tax on the profit
That is also completely mistaken. You might be liable for capital gains tax, but not income tax. Again, they are two different things, and are taxed at different rates. Arguably, if buying and selling audio equipment was your livelihood, you would be liable for income tax. But in that case, your calculation of "profit" is faulty, because the earner would deduct from what you call "profit" all of his expenses: the cost of listing the ad, rent, phone, insurance, and so on.
The Federal Inheritance Tax Threshold is $625,000.
Consistent with earlier comments in the thread there is no such thing as a Federal Inheritance Tax, meaning that heirs do not have to pay Federal tax on their inheritance. There is a Federal Estate Tax, which is unified with the Gift Tax. The current Estate Tax threshold is $5.45 million, as I mentioned earlier. (See "Which Estates Must File" on page 2 of "Instructions for Form 706" at the IRS website. Also, as stated on page 1 of that document, "the basic exclusion amount is $5,450,000" ). The threshold was $625,000 in 1998.
You inherited a rare Amplifier that was appraised at $20,000 at the time of inheritance. Some Audiophile on Audiogon purchased it for $25,000. You are required to pay Income Tax on the $5,000 profit.
To be precise, I believe that the tax on the $5,000 would be levied based on long-term capital gains rates, not on ordinary income rates.
Well, Steve, Yes if only get down to Bill of Rights as a stereotype, "Double Jeopardy" applies to prosecutions and punishments only, but if you get out of stereotypes and look around farther and broad, than such meaning easily fall onto the common sense I've mentioned.
"Double jeopardy", which comes from the Fifth Amendment, applies to CRIMINAL prosecutions and punishments only. It has absolutely no relevance to any civil law matter, such as civil tax matters. All courts throughout U.S. history have always so found. Any attempt to apply this concept to a civil tax matter is 100% nonsense. ---Steve
If it’s used than tax had already been paid and double-jeopardy will make no sense.
Not sure if you are referring to sales tax that may have been collected by the original dealer from the original purchaser, or to income tax that may have been paid by the original dealer based on his profit from the sale. But neither is relevant to the question.
...you can even claim losses out of this sale endeavor.
Yes, as I mentioned in my initial post that is a possibility, within certain limitations.
I used to keep up with the tax code as it pertains to residential real estate, including rental properties and such. BUT, the changes to the tax code started coming so rapidly, I just couldn’t keep up with it anymore. Now, the tax code exceeds 77,000 pages and contains over 9 million words.
For a Realtor (or anyone else) to give tax advise to a client is just opening up one’s self to a law suit. Anymore, I just refer my clients to their CPA or to their tax attorney. Knock on wood ... 40 years and never been sued.
Who’s going to read 77k pages? Instead of that more-likely it will be driven by common sense and the common sense is that it’s a USED product not new. If it’s used than tax had already been paid and double-jeopardy will make no sense.
If you get 1099 -- it’s a very flexible form allows you to wriggle your spending and earning to the point you can even claim losses out of this sale endeavor. All you have to do is to bring this form via TurboTax and fill-in
ALL of your expenses towards this form including gas, airplane tickets(if any mak’em business trip and include your wife and family members as well), shipping labels, shipping materials(hey they can be more expensive than unit itself) Check out UPS packaging services that sell you large corrugated boxes for over $100 each! There are sooo many items you can claim claim and claim as losses that will overlap these measurable $60k TWICE.
Good chance your friend will get a 1099 from PayPal. If so PayPal will also send a copy to the IRS. I would imagine the person that does his taxes will have to fill out a form explaining the money from the sale of the estate items. Also probably proof of inheritance of the items sold.
Quote:
What is Internal Revenue Code (IRC) Section 6050W?
Under the IRC Section 6050W, PayPal is required to report to the IRS the total payment volume received by US account holders whose payments exceed both of these levels in a calendar year:
US$20,000 in gross payment volume from sales of goods or services in a single year
200 separate payments for goods or services in the same year
IRC Section 6050W applies to all payment processors, including PayPal. Our goal is to help PayPal sellers understand and comply with the requirements.
This is one of the reasons I like this site so much. Usually one can find expertise in what ever subject one may be interested in besides audio. Also, there are folks like yourself who are here willing to be of help.
After spending 40 years as a Realtor in the Southern California market, I learned long ago not to give tax advise to my clients. I used to keep up with the tax code as it pertains to residential real estate, including rental properties and such. BUT, the changes to the tax code started coming so rapidly, I just couldn't keep up with it anymore. Now, the tax code exceeds 77,000 pages and contains over 9 million words.
For a Realtor (or anyone else) to give tax advise to a client is just opening up one's self to a law suit. Anymore, I just refer my clients to their CPA or to their tax attorney. Knock on wood ... 40 years and never been sued.
Hi- I am a retired tax attorney in California. I am not currently authorized to practice law in California ,due to non-payment of state bar fees, and for no other reason. Therefore, you should NOT rely upon this advice. I have represented both taxpayers and the I.R.S.for many years, and have also worked as an attorney-advisor to judges of the U.S. Tax Court in Washington, D.C. I can make the following general observations. Any federal estate tax would be owed and paid for by the estate itself, not by your friend, There is a minimum estate value that the estate has to exceed before any estate tax kicks in. I do not know what that amount currently is because I have not checked it in many years, and it does change frequently. $5.4 million sounds about right, however. As for any possible federal income tax liability, your friend most probably does not have any from the audio equipment sales. Your friend's basis in the audio equipment would be the fair market value of the property as of the decedent's death (or the alternate valuation date as determined by the executor). Since, as we Audiogoners know, the value of audio equipment almost always goes DOWN over time, it is extremely unlikely that there would be any capital gains, and hence no federal income taxes due from those sales. Hope this helps. ---Steve
I believe, you have to inherit over 5 million before you owe any inheritance tax to the Feds..... You’ll have to look up the exact information because it changes.
No, that isn’t correct, Kenny. The $5 million threshold (actually $5.45 million at present) is a threshold that determines whether or not an individual’s estate (not the heirs) has to pay an "estate and gift tax." Also, in addition to the value of the estate gifts made during the decedent’s lifetime that are in excess of the annual gift tax exemption count toward that threshold.
As far as taxation at the Federal level is concerned the inheritances pass tax-free to the heirs regardless of their value. But if inherited property is subsequently sold by an heir my previous comments apply.
I believe, you have to inherit over 5 million before you owe any inheritance tax to the Feds. And, there are only a handful of states that collect inheritance tax at all. You'll have to look up the exact information because it changes.
What may be important to determine, is the value of the audio gear at the time you inherited it. This would be the basis value to figure out if you owe taxes or not, but only when you sell it, so did you have a profit or loss from the sale? I realize this is your friend's equipment. So, if your friend's equipment was valued at $65K when he inherited it. If he sold it later for $60K, he would have no tax owed.
However, he should ask his accountant about this stuff, because I'm not an accountant. Kenny
+1 Al. Coordinate with the executor of the will regarding valuation. Also note that if the inheritor was a named beneficiary for those items in the will, then it may be that the inheritance passed tax-free and may be disposed of without liability. This can depend on the overall value of the estate. Some states may have additional wrinkles based on value, too.
Not necessarily. There may be a capital gains tax liability (as opposed to a tax liability based on ordinary income) if the amounts realized by the sales were greater than the fair market value of the items at the time of the decedent’s death, or at the time of an alternate valuation date if an alternate valuation date had been chosen by the executor. Also, tax forms might have to be filed even if there is no tax liability, although I haven’t done sufficient research to be certain of that. See this reference at the IRS website.
Also, if a capital loss occurred relative to the fair market value at the time of the decedent's death or alternate valuation date it may be possible to deduct some of that loss against ordinary income, up to a certain amount during this and subsequent years.
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