When it comes to the Internal Revenue Service, it is not always easy to know all of the consequences before you act. That is because the tax law can be very difficult to understand and it is complex even for tax experts. Even if you believe you have followed all of the rules, a tax regulation can blindside you.
Below are 5 tax issues that might surprise you this tax season:
1. Unemployment Benefits
– If you lost your job, you are probably receiving unemployment benefits to help you get through this tough financial period. Do not get shocked when it is time to file your taxes because you are going to have to pay taxes on the unemployment benefits as they are considered wage income
You should consider having your federal income taxes withheld from your unemployment check to avoid paying it all at the beginning of the year. Fill out federal form W-4V, the Voluntary Withholding Request. You could also pay estimated taxes throughout the year.
–The divorce is finally done with and your spouse is paying alimony. No more stress, right? Not necessarily because you have to deal with the IRS now. Alimony payments are completely taxable in the year that they were received. Child support payments are not taxable. If you want to avoid a large tax bill, you should make estimated tax filings throughout the year.
If you are the spouse making those payments, there is a bit of good news. The amount you pay in alimony is tax-deductible.
3. Forgiven Debt
– In general, a forgiven debt is considered an amount that is earned by the taxpayer and is taxable as income to you. The debt holder will send you and the Internal Revenue Service a 1099-C Form or other statements that detail the amount of the forgiven debt as misc. income.
Taxes are not required to be paid on all forgiven debt. The Mortgage Debt Relief Act of 2007 allows some homeowners that were granted mortgage debt forgiveness not to pay taxes on the forgiven debt. This only applies to mortgages that were forgiven from 2007 to 2013. Other restrictions apply. It does not apply to vacation homes or second homes. Also, the amount is limited to $1 million or $2 million for married filing jointly taxpayers. This mortgage debt relief expires in 2013 unless Congress extends it.
– If you were lucky enough to win a cash price in a local radio contest or even a brand new television, Uncle Sam is also lucky. You owe part of your winnings to the IRS. Winnings are part of “other” income that is taxable under the tax law. This also applies to gamble proceeds.
When you win a noncash prize, you owe taxes on the FMV (fair market value) of the prize you won. Be very careful when you report a noncash prize amount. The company that awarded you the prize should send you Form 1099 that will declare the property’s value. If you report a different amount, the IRS might require your tax return to be reviewed by an auditor.
5. Certain Social Security Benefits
– You have worked for over 40 years paying your Social Security taxes each and every paycheck. Now it is time to retire and receive your social security benefits free and clear, right? That is not always the case. In general, if Social Security benefits are the only source of income you have, they are not taxable. If you are collecting Social Security in addition to other income, up to 85% of your Social Security Checks could be subject to income tax.