Your mom may have told you that life isn’t fair, and no one claims that life is easy. Taxpayers in certain situations may agree with both of these sentiments.
The tax law is complex and difficult even for experts to negotiate. Just when you think you’ve followed all the rules and researched all the angles, a tax regulation blindsides you.
Here are five terrible tax surprises that you might encounter during tax season and how to deal with the consequences.
Under tax law, unemployment is considered wage income, and the IRS wants a cut.
Now that you’re over the shock and anger, what can you do?
Ending a marriage is never a happy event. If you got a good settlement, those regular checks from your ex-spouse are taxable.
Alimony, separate maintenance payments and similar compensation from your 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 alimony and child support and specifies amounts for each, you owe the IRS only for the alimony payments.
To avoid a big bill in April, make your IRS payments on alimony and other untaxed income via estimated tax filings.
In between these filings, you can park your cash in a high-yielding savings account.
The one good tax surprise here is for the ex who’s paying spousal support. Those amounts are tax-deductible.
Getting your credit card bill cut from $8,000 to $4,000 certainly helped your personal bottom line. It also could be a boon to the U.S. Treasury.
Why? Whenever you get a creditor to write off debt, the tax law generally considers the amount earned income. That means it’s taxable to you. Expect the accommodating debtholder to send you (and the IRS) a Form 1099-C or similar statement detailing your discharge of indebtedness as miscellaneous income.
Not every debt settlement, however, has to pad Uncle Sam’s pocket. Under the Mortgage Debt Relief Act that became law in 2007, some homeowners who were granted forgiveness of mortgage debt in 2016 won’t have to pay taxes on that amount.
There are some restrictions:
This tax break is temporary and will end if Congress doesn’t retroactively extend mortgage debt relief beyond 2016.
Think you’re pretty lucky because you won $1,000 in a contest?
Prize winnings are included in the long list of “other” income that tax law says is taxable. And it’s not just limited to cash awards. You have to pay taxes on the fair market value of any property you win.
Be careful when reporting the amount of a noncash prize. In most cases, companies and groups that award prizes, cash and property will send you a 1099 form declaring the value of what you won.
Note that gambling proceeds are taxable, too. But at least you get the chance to reduce the tax bite here by subtracting any betting losses from your winnings.
If you come into some money, it’s smart to put it into a high-yielding savings account.
When you retire, some of your Social Security benefits may be taxed.
Generally, if Social Security benefits are your only income, your benefits are not taxable. But if you collect Social Security plus other income, as much as 85 percent of those government payments 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 worksheet found in your tax Form 1040 or 1040A. Or your tax software will automatically figure your tax liability for you.
If you discover that you will have to pay taxes on Social Security benefits, there are two ways to deal with them:
Thinking about downsizing in retirement? Check mortgage rates today at Bankrate.