You’re likely accustomed to paying taxes, despite how unpleasant it can be. A Gallup poll from 2023 found that sixty percent of Americans believe their income taxes are excessive. However, you may be in for some disagreeable revelations, and you may owe more than you anticipated.
Here are seven situations that may not have occurred to you as taxable occurrences.
1. Legal Awards
You were awarded a settlement or a judgment following the conclusion of a litigation. Hold off on your intentions to spend it all, however. Frequently, the award will be considered taxable.
“It depends on whether it is replacing taxable income,” explains Steven Terrigino, a certified public accountant and partner at The Bonadio Group. “For instance, if the award was for slander, punitive damages, or insurance reimbursement, you must pay taxes on it.”
There are a few exceptions to this rule, such as if the case involved visible bodily injury or if you were unwell.
“For instance, if the award resulted from a car accident, someone destroying your property, medical malpractice, or a class action lawsuit, it would not be taxable,” Terrigino explains.
2. Unemployment Benefits
Romeo Razi, CPA and founder and proprietor of Taxed Right, a website that publishes free tax information, says that the majority of people who are laid off or lose their positions are surprised to learn that they must pay taxes on unemployment benefits. In fact, this is one of the most common locations where taxpayers are surprised by an unexpected tax expense when filing their tax returns.
Check the box indicating your agreement to have at least some taxes withheld if you’re applying for unemployment benefits. You’ll likely need as much money as possible to pay your expenses while you’re unemployed, but make it a point to extend yourself.
“The safest course of action is to withhold some tax,” says Razi. Typically, they will ask you to withhold between 5 and 10 percent. At tax time, you won’t be sorry. And if it turns out that you overestimated, you may receive a refund.
3. Social Security Retirement Benefits
The wonderful part about retirement is that you no longer have to pay income taxes, right? Not absolutely.
“Most retirees believe that there are no taxes on Social Security,” says Razi.
“That is only true if you have no other source of income. However, if you earn income outside of Social Security, you may still owe Uncle Sam. Even if you’re retired, the IRS will not let you off that easily. “If you earn more than $34,000 or $44,000 if you’re married, you may be required to pay taxes on up to 85 percent of your Social Security,” he adds.
According to Razi, the IRS computes your Social Security tax based on your total income, which is comprised of 50% of your Social Security payments, your adjusted gross income, and your tax-free income (such as tax-exempt interest).
Depending on your total income, you may be required to pay taxes on a portion of your Social Security benefits.
4. Winnings and Prizes
You wagered and won, how thrilling! In many instances, you will not be able to retain all of the money, so be prepared to pay taxes. Generally, if you win more than $600, you must file Form W-2 G with the IRS to report your winnings.
“It is considered income whether you won the lottery, played fantasy football, or won big at the casino,” Terrigino explains.
If you went to Las Vegas and won large at the blackjack table, a casino employee will typically give you the tax form prior to receiving your settlement. If this does not occur, you will receive the form in the mail. According to the IRS, a fixed rate of 24% will be withheld for federal taxes.
This also applies to game show prizes and fundraising prizes, according to Terrigino.
“I had a client who won an automobile after participating in a ‘hole in one’ contest, and he had to pay taxes on it. Identical to a raffle. “If you purchased a $5 ticket and won $5,000, that is taxable income,” he explains.
5. Forgiven or Canceled Debt
There may have been a time when you racked up a substantial amount of debt but were unable to pay it off, so you ignored the bill. Eventually, you either negotiated a settlement with the creditor in which you paid less than you owed, or the creditor ceased contacting you and canceled the balance. Now you may exhale.
What to Do When You’re in Severe Debt.
Until you receive a 1099-C tax form in the mail. The letter “C” stands for debt cancellation, and it indicates that you did not abandon as much as you believed. The IRS requires reporting of forgiven debts of $600 or more as income.
“When I have to explain to people that they must pay taxes on cancelled debt, I observe the most anger and frustration,” says Razi.
However, according to the government, if you do not have to pay it back, it was not a loan.
“It was gratis money if it wasn’t a loan. Free money is not actually free, so you must now pay taxes on it. It makes no difference whether it is a mortgage, credit card, or auto loan. If the debt is forgiven, the Internal Revenue Service is entitled to a portion,” he adds.
6. Bartering
Consider that you can avoid paying income taxes if you are paid in products and services rather than currency. The IRS expects you to include the amount in your gross income. You must report bartering at the fair market value of the products or services involved.
“For instance, if I traded tax services for plumbing services with one of my clients, I would need to determine the fair value of the plumbing services I received and report it as income on my taxes,” explains Razi.”The plumber would have to do the same with the tax services I provided.”
Read Also: Exploring the SAVE Program: Pros and Cons of Student Loan Repayment
Source: US News
