taxes

5 terrible tax surprises

Prize winnings

Think you're pretty lucky because you won $1,000 in a radio contest? Uncle Sam is even luckier. He's due part of your winnings.

Prize winnings are included in the long list of "other" income that the tax law says is taxable. And it's not just limited to cash awards. You've got to pay taxes on the fair market value of any property you win. So get ready to come up with some cash for Uncle Sam to cover that new Corvette the local Chevrolet dealership presented to you as part of its latest promotional contest.

Be careful when reporting the amount of a noncash prize. In most cases, companies and groups that award prizes, both cash and property, will send you a 1099 form declaring the value of what you won. If your tax return reports substantially less than what the giver claims, your under-reporting could mean a long, hard look from an IRS auditor.

But don't cheat yourself, either. It's not inconceivable for a prize presenter to overvalue a gift. If you find yourself in this situation, it is possible to do your tax duty without paying too much. Bankrate's tax adviser George Saenz has some advice on how to reduce your taxable prize amount.

And don't forget about gambling proceeds. They're taxable, too, but at least you get the chance to reduce the tax bite here by subtracting any betting losses from your winnings.

Some Social Security benefits

You spent the last 40 years fattening the U.S. Treasury thanks to those dang Social Security taxes that came out of every paycheck. Now you're retiring and it's time to get your tax money back, free and clear, right?

Well, maybe. Maybe not.

You certainly are entitled to the Social Security benefits your payroll taxes went toward. But the IRS also could take a bite out of those federal retirement checks.

Generally, if Social Security benefits are your only income, your benefits are not taxable. From the IRS's standpoint, Social Security benefits include monthly survivor and disability benefits; supplemental security income payments are not taxable.

But if you collect Social Security plus other income, as much as 85 percent of what Uncle Sam pays you could be subject to tax. To figure out just how much in taxes your Social Security might cost you, you'll have to do some calculating using the work sheet found in your 1040 or 1040A tax package.

If you discover that you will owe taxes on some of your Social Security benefits, there are two ways to deal with them. You can make estimated tax payments on the government check amounts. Or you can have federal income tax withheld from your benefits by completing Form W-4V, Voluntary Withholding Request, and filing it with the Social Security Administration.

This tax tip has more details on taxation of federal retirement benefits. And for more financial strategies as you count down to retirement, check out Bankrate's collection of retirement planning stories.

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