Thanks, that makes it very clear that taxes will need to be filed. Is it filed on the parents’ tax return or individual for the child? I am assuming individual.
It would be on the tax return for the person who won/earned the money.
No, it doesn’t …
My daughter has reported all her cash winnings. I suspect the organization that awarded this prize will report it to the IRS.
Actually voluntary is how it is defined, as in it is your responsibility to report your income and file your tax return. Of course there are consequences for not voluntarily complying. When the income is not reported to the IRS as in the situation with the OP, it definitely becomes voluntary, based on individual ethics(and fear)!
"the nature of the voluntary tax system in the U.S. takes the calculation of taxes owed out of the hands of the federal government. You are responsible as an individual taxpayer to calculate what you owe. You’re expected to voluntarily comply with the tax code by reporting what you owe to the government and paying the entire amount that you owe under the law.
Although the U.S. tax system is voluntary, failure to comply carries stiff penalties. If you under-report your income or overstate your deductions, you’ll face fines and interest charges. If you fail to file a tax return, the IRS will file a substitute return based only on the information it has — meaning you likely won’t receive the benefit of any deductions and will end up paying more tax than you should. The IRS also has the power to levy your bank accounts, garnish your wages and place a lien on your property if you don’t voluntarily pay what you owe. In serious cases, you may even face criminal charges.
In other words, the “voluntary” aspect of taxation is that you’re allowed to figure up your own tax liability, either on your own or by hiring professional assistance. It has nothing to do with the nature of taxation itself, or your obligation to participate in the system."
Any word, including ‘voluntary’, can be misused.
Regarding the question of whether I report $1 or $2 lottery winnings - if I played the lottery I most likely would have spent far more than that on total tickets, so no the winnings would not need to be reported, because the expenses exceeded the income.
Regarding not reporting because you don’t get a 1099:
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As someone stated above - there is a question of ethics. The tax code is clear that all taxable income is to be reported.
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I have had clients who never received their copy of the 1099 - usually due to a bad address. However the IRS and state tax board did get their copies. And as someone stated above, the interest and penalties on under reporting income can be severe.
the “kiddie tax” means that even if the kid files his own return, he or she can still need to pay the parents’ rate on unearned income, which this is I believe.
I don’t believe a tax expert is necessary. Turbotax will do the work for you.
This is no different from a number of past discussions about what is taxable in terms of scholarships. The answer is still as simple as it was before. All income is taxable unless it can be offset by … deductions. It sounds overly simplistic but that it is how it works. One needs to find a reason to exclude or reduce the income. Scholarships and prizes work in the same exact way. You add all the plusses and look for minuses to offset (as in scholarship offset by tuition but not room or board.) It is not that room and board is taxable but that is NOT subject to an exclusion.
In many cases, the biggest issue is with FICA as opposed to income taxes due, as there are far fewer exceptions.
That advice is incredibly poor as it is completely wrong. The lack of an informational reporting does not create an excuse to not report the income. With or without a 1099, the obligation remains the same.
For a pragmatic answer, the prize or scholarship should reported on the first line of the tax return, but one might also attach a statement that describes the gross amount and eventual deductions. The entry of the tax return could be for the net amount. The statement is essential.
But the question is not whether income is taxable, but whether the prize money is income. Unless it is otherwise designated as a scholarship, I think it is. Winning Miss America gets the winner scholarships because that’s how the contest organizes it. If this is just a check, and the teen can use it for college or ice cream or any other purpose, it is income.
Nope! Again, ALL scholarship money is taxable but the reportable income can be offset by deductions. The only grey area is the one of athletic scholarships.
A scholarship can have zero tax liability but it is not because it is a scholarship. It is because it can offset the cost of tuition, which is an allowable deduction. It is also excluded from FICA.
I said prize money is income if it is not designated as a scholarship.
I disagree that all scholarship money is income or taxable. Only that which is in excess of QEE is taxable unearned income. If a scholarship is used for QEE it is never income and never described as income by the IRS. A scholarship in excess of QEE becomes unearned income by definition. In the case of a prize, if the sponsor sets it up as a scholarship, it may never become income if used for QEE.
There are lots of things that have to potential to be income as defined by the IRS but never become income. Housing, meals, travel expenses, uniforms, discounts, employee benefits. These items have the potential to become income but under some circumstances, don’t. Ministers, military, on-site workers, employees all receive benefits that could be income if paid in a different way or if conditions aren’t met.
If I were the OP, I’d save all my receipts for income and expenses related to the music competition awards and hire local accountant. The accountant need not be a CPA. If you hire a CPA, you will get the same advice, but you will pay more. A CPA is a “public” accountant meaning they have a license from one of the 50 states to sign audit reports.
The audits public accountants do, usually for SEC registered public companies, or non-SEC registered private companies that need a bank loan (and the bank can’t make a decision without an audit) have absolutely nothing to do with federal taxation so. like I said, you are best off hiring an accountant who is not a CPA but is an expert in federal and state taxation. Financial reporting and tax law and regs are two different animals.
I am not up to date on tax law, life is far too short to worry about that nonsense, it should be simplified but don’t hold your breath, but I do know enough to say that US Tax law differentiates income derived from a business from income derived from other sources, such as a hobby. If the income is derived from an ongoing business, the costs of generating that income become deductible, and the taxes are paid on the “net” amount which is net income (also called profit). Fine so far, right?
If the income is derived from a nonbusiness source, the chances of deducting the expenses are diminished. Basically. So, the OP’s question about all those lessons and travel and training and related expenses probably are not deductible because it doesn’t sound like this was the OP’s child’s business to compete in music competitions. EA’s, enrolled agents, are also tax experts and they may or may not be accountants and there is also something called tax preparers or something too. The point being … not all accountants are the same. Just like any other profession, accountants branch off into specialties.
I’m not sure if anyone has mentioned IRS Pub 970 yet which deals with scholarships and QEE’s. As far as reporting the income from winning music competitions, whoever said it should be reported on the party that earned it is, in my humble opinion, correct. Whoever commented on the “kiddie tax” and said that is a tax on the income of passive assets (basically investments) that the child earns but could be reported by the parents had that right. The IRS, and I very possibly could be wrong on this, could tax that income at the parents rate because by shifting the assets to the child it is a scheme to get the income into the lower tax brackets and frankly I don’t recall how that all works.
Is it complicated?
Let me put it this way, I was a CPA for 11 years and even though I am not a CPA now, I teach I do not practice, I can barely fill out my own tax return. Half the people I work with, accounting teachers, have the same issue because we have kids in college or rental properties and so forth and even we get confused because we don’t read up on it on a weekly basis. It is not my job anymore to stay up on this stuff and like I said life is too short to worry about it. If I had to make a living that way, I’d go hungry (I had that exact same thought in grad school).
I was proud of myself though, this year, after reading Pub 970, when I found a legal way to report some of my son’s scholarship awards on his tax return as income (lower marginal tax rate) and by doing that it allowed me to get the full education credit to reduce some of my taxes and saved $2,500 by reading that pub. I’ll say this, the IRS, and the people who write the regs, should be guillotined. It is a serious abomination on the US public to deal with this nonsense. It should be far simpler.
Agree with post 29. It doesn’t matter whether the sponsoring group sends your kid a 1099…or not. This needs to be included as income on the KID’S income tax form.
And if that money is still the kid’s on the day the financial aid applications are filed, it would also be considered an asset.
I don’t mind paying the taxes. I don’t need the deductions. I just don’t want him to get a tax cheat stamp. Yes, I am a bit paranoid about the IRS or any other Govt agency. Comes from being an immigrant.
The kid hands over the checks to us and doesn’t have a bank account either. He has no money in his name other than the 529s. But I don’t think we would apply for finaid as we won’t qualify for anything anyway at our current income level. That can drop, of course, but I hope not, for reasons solely related to my own standard of living and unrelated to college. 
Thanks everyone!
and just for fun…all lottery winnings are taxable technically. There is a potential to deduct gambling losses but only to the extent that gambling winnings are reported. The losses are claimed only if the taxpayer itemizes, though.
Many people who play the lottery regularly don’t save their losing tickets. Then at the end of the year they win something bigger than normal and have to report the winnings. Many scramble to find the discarded ‘losers’, ask friends for their, look in trash cans for some to offset the winnings. Life’s tough.
I realize that college admissions and college financial aid have separate offices. But I’d be very concerned about my child listing on his or her college application that he or she won a musical competition that came with a prize and then claiming on financial aid applications that he or she had no income.
Hope the above that is not directed at me as when the time for college comes my son would not apply for finaid at all as our family income would make him ineligible.