5 nasty tax surprises
The government doesn't care how much suffering was brought about by unemployment or alimony. You still owe taxes on that and other income you may not have considered.
This post is by Kay Bell at Bankrate.com.
You've always followed the sage advice of the late singer-songwriter Jim Croce: You don't tug on Superman's cape, you don't spit into the wind, and you don't try to pull a fast one on the Internal Revenue Service.
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.
Here are five terrible tax surprises that you might encounter during tax season and how to deal with the consequences.
Yes, it's true. Under tax law, unemployment is considered wage income, and the IRS wants a cut of it.
Now that you're over the shock and anger, what can you do? When you apply for unemployment benefits, consider having federal income tax withheld. This process is similar to regular payroll withholding. 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% of each unemployment payment.
If you feel as if you just can't surrender a chunk of each unemployment check to withholding, you should look into paying estimated taxes. This will help you avoid a large lump-sum tax bill when you file.
You survived the divorce. Now you have 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 ex-spouse are completely warranted. They also are completely taxable.
Alimony, separate maintenance payments and similar recompense 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.
The one good tax surprise here is for the ex who's paying spousal support. Those check amounts are tax-deductible.
"Forgive but collect" is the IRS motto when it comes to canceled debt.
Getting your credit card bill cut from $8,000 to $4,000 certainly helped your personal bottom line. But it also could be a boon to the U.S. Treasury. Why? The tax law generally considers the amount you get any creditor to write off as earned, and therefore taxable, income 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 line Uncle Sam's pocket. Under the Mortgage Debt Relief Act that became law in 2007, some homeowners who are granted forgiveness of mortgage debt won't have to pay taxes on that amount.
There are some restrictions. The forgiven debt amount is limited to up to $2 million, or $1 million for a married person filing a separate tax return. The tax relief applies only to mortgage debt discharged by a lender between 2007 and 2013 (after the latest extension). And the forgiven loan must have been taken out to buy, build or substantially improve a primary residence, not a second or vacation home.
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 tax law says is taxable. And it's not limited to cash awards. You have to pay taxes on the fair market value of any property you win.
Be careful when reporting the value of a noncash price. 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. If your tax return reports substantially less than what the giver claims, your underreporting could mean a long, hard look from an IRS auditor.
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 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.
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% of those government checks 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.
If you discover that you will owe taxes on some of your Social Security benefits, there are two ways to deal with it. 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.
More from Bankrate.com and MSN Money:
What about the dump all on American shores tax free from any foriegn country why is that never addressed.
Big mistake in this article. It called Social Security a tax. It use to be, but the government in it's finite wisdom and trying to pull the wool over our eyes, decided to reduce the max amount that we pay in taxes from 64% (I think) to 38% ( I guess) by saying Social Security is now not a tax. You still have to pay in like it's a tax and your net income doesn't change. So now you still pay in 64% but only 38% is considered a tax. Great country America.
I use to love this country. Not so much these days with the way it's being run. Government by lobbyists doesn't work and never will. It's allowed the jokers who caused the Great Recession (it's really a depression) to take over some of the appointed offices. Example - Geithner now Secretary of the Treasury. He worked hard at stopping legislation which would have controlled Derivatives and those things caused the economy to implode.
hahaha...Obama and demos promise you as much unemployment as you want stay on the gravy
train and then hit you with a tax bill! good for all you who don't work live off the rest of us and now
Obama is stabbing you in the back! now you know how it feels? what a guy uh? and then he raised
the payroll tax on you libs! and here comes Obama care taxes and death panels! and here comes all
the green energy taxes and hikes in cheap energy and food and gas etc....great liberal agenda uh?
Um - gambling losses are NOT subtracted from Gambling winnings. Gambling winnings are part of adjusted gross income. Gambling losses are an itemized deduction. You can break even gambling and still substantially increase your federal tax bill depending on other earned income and the gross amount of gambling winnings and losses.
Why? Because AGI is used as a limitation on many tax related items - such as Deductible IRA's, limiting medical deductions, limiting misc itemized deductions, etc.
Margaret Thatcher once said, the biggest problem with socialism is eventually you run out of other peoples money. Once this government has drained all it can from the rich, who do you think they will come after next. Wake Up America. Obama's socialist policies will only work if everyone has some skin in the game, however with nearly 47 percent of the american people not paying federal taxes, they have no skin in the game, and have no problem voting everyone else a tax increase as long as they keep getting their freebies they dont give a rats rear end how much you pay.
I call an ugly surprise that famous "offset" the government does on your SS benefit when you start receiving your monthly retirement check from a retirement account at work. They deduct that amount from your SS benefit as an offset, not to allow you to "double-dip" even if you funded the two accounts yourself with the product of your work and through your withheld SS payments from your wages..
We have to thank Mr. Ronald Reagan for that little favor.
I am a military retiree drawing Social Security. As such I pay taxes on 85% of my Social Security. Additionally I pay taxes on my Military Retirement. I am married and my wife and I are (by Law) 100% disabled. I am not complaining but somewhere in the future I would like to be able to tell the government to F... off. Back 50 years ago when I enlisted in the military I was told by my recruiter that I would never have to pay for health care (including my wife) again . Bull...they took that away..Medical care and prescriptions cost me aproximatly 500 dollars a month. Ex wife costs me 1/3 of my retirement and we've been apart for over 20 years ( mind you this is not alimony but separate maintenance demanded by the government.). ( a little over $6,000 dollars a year). Don't forget county and state taxes plus 7% at the grocery store. As The song by Jerry Reed ..."It takes more then this boy makes."
I was under the misconception thea once I turned 65 thta I would be getting some breaks..tax wise...
well I am almost 71 and taxes keep taking more of my menial income.
Those are not ugly surprises, but only run-of-the-mill taxable items.
However, it is your choice to pay some amount on your unemployment benefits and that amount better be enough tp cover your tax liabity or be ready to cough it up coming April 15.
Generally, though, it is better to be receiving these monies than not...
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