Music royalties income received during retirement considered investment income by IRS

[michaelkamen-com]

Hi all,

My wife was a self-employed musician before retiring in 2022, and earned royalties that she still receives annually.  The IRS states that this should be entered on a form 1040 schedule E as it is now considered investment income (that is to say, related to work invested in an earlier year).  

She still receives an annual 1099-MISC statement related to this royalty from the distribution fund managing it.  I have started doing our taxes, in Turbotax, and cannot seem to find anywhere to enter the 2023 royalties such that it goes onto a schedule E.  

Please advise.

[Vanessa A]

To enter your 1099-Misc as royalty income which will then flow to schedule E select the following:

• Federal
• Income
• 1099 Misc under Other Common Income
• Enter your 1099-Misc

[michaelkamen-com]

Hi, thank you for responding.  I already did what you have suggested here.  The data flowed to the Business section and was treated as business income.  Please advise.

[DianeW777]

When you entered the 1099-MISCs you should have entered the amount received in box 2.  Check your entry to be sure you have the royalties in the right box.  If necessary delete the 1099-MISCs and follow the steps below so that they show up on the Schedule E if you are not in business.

• Where do I enter my 1099-MISC? 
  • You can always enter it directly on Schedule E using the steps below.  To enter a 1099-MISC for rental properties and royalties (Schedule E) in TurboTax: Search for rental income and expenses and select the Jump to link.

@michaelkamen-com 

[michaelkamen-com]

Diane,  as I said, using the 1099-MISC data entry causes the income to flow to business.  I deleted the 1099-MISC and went directly to the schedule E form.  All the royalties material that seemed relevant on that form pertained to intellectual properties that are taxed at the regular non-business level.  But there was nothing to indicate the income was to be treated as investment, i.e.,  income from work done before retirement to provide income after retirement.  Please advise.

[michaelkamen-com]

. . .  In other words, it flowed to the business section just as it had done before.

[michaelkamen-com]

The income is clearly not oil and gas royalties, although I understand those are treated as ordinary income rather than business income.  It seems disingenuous to claim that this income is that.  Surely there must be a way to enter these small royalties for work done prior to retirement as what they are without tacking on a self-employment tax!

[ThomasM125]

When you enter the Form 1099-MISC, you need to indicate that the source of the income was Royalty investment income from a natural resource, intellectual property or other investment portfolio. That response will make it appear on a schedule E, which is what you want I believe. That question will not appear on your tax return, it is just used so TurboTax can determine where the income should be reported. You will probably need to delete the entry you have made and do a complete new one as opposed to editing the entry you have already made.

[michaelkamen-com]

Thanks Thomas M, 

Unfortunately my understanding, of the IRS.gov information I had read that appeared to suggest that during retirement we would not have to pay self-employment on music royalties, was in error.  As it turns out, royalties are always subject to self-employment tax both before and after retirement.  whether the royalties are payments for oil and gas land use rights obtained or for music recording session work performed or other.  The only question at stake is, was the recipient of royalties actively self-employed in the pertinent field of work at the time.  So in our case, it does not matter whether we call the royalties on our 1099-MISC by their true name or we pretend they are something else to get them on a schedule E -- we have to pay self-employment tax on those royalties regardless.  There appears to be no advantage for

My question therefore was based on my misunderstanding.  Thank you for advising me as to how I could force this income onto a schedule E by calling it oil and gas royalties.  The income is now on Schedule C where it belongs and I now understand that, given unchanged tax law, that is where it will go in future also.