taxes

5 terrible tax surprises

You've always followed the sage advice of the late singer-songwriter Jim Croce: You don't tug on Superman's cape, spit into the wind or try to pull a fast one on the IRS.

OK, maybe that last one wasn't one of Jim's lyrics, but the sentiment -- know the consequences before you act -- still applies.

Unfortunately, that's not always easy to do when it comes to Uncle Sam's tax collectors.

The tax law is complex and difficult for even experts to negotiate. Just when you think you've followed all the rules and researched all the angles, a tax regulation blindsides you.

Surprising tax laws
There are many arcane and infuriating tax laws that cause filers problems. Here are five that many people might run afoul of during tax season.
  1. Unemployment benefits
  2. Alimony payments
  3. Forgiven debt
  4. Prize winnings
  5. Social Security retirement payments

Unemployment benefits

Yes, it's true. Your unemployment benefits are taxable.

Under tax law, unemployment is considered wage income and the IRS wants a cut of every type of income you collect.

Now that you're over the shock and anger, what can you do?

If you get laid off, when you apply for unemployment benefits consider having federal income taxes withheld. This process is similar to the payroll withholding you encounter when you collect a paycheck. In this case, the form you fill out is the federal W-4V, Voluntary Withholding Request, or a similar, IRS-acceptable document that the paying agency has created. This way, taxes will be withheld at the rate of 10 percent of each unemployment payment.

However, since unemployment compensation is usually less (and sometimes a lot less) than your former paycheck, most people decide against having taxes withheld. This means you get your full unemployment check to use toward day-to-day expenses. But it also means you'll owe the IRS when you file your next income tax return.

You can avoid a big lump-sum tax bill on April 15 by paying quarterly estimated taxes on your unemployment income. And for help on managing your finances and taxes after getting a pink slip, check out this Bankrate article.

Alimony received

You survived the divorce. Now you've got the IRS to deal with if you're getting alimony.

Ending a marriage is never a happy event. But at least you got a good settlement and those regular checks from your (insert your own description here) ex-spouse are completely warranted. They also are completely taxable.

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Alimony, separate maintenance payments and similar recompense from your spouse or former spouse are taxable to you in the year you receive them. Child support money, however, is not taxable. If your divorce decree calls for both alimony and child support and specifies amounts for each, you only owe the IRS for the alimony payments.

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Our tax expert Kay Bell provides resourceful tips and advice to help you stay prepared for filing.

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