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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.

By MSN Money Partner Jan 8, 2013 1:20PM

This post is by Kay Bell at Bankrate.com.

 

© Spohn Matthieu/PhotoAlto Agency/JupiterimagesYou'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.

 

Unemployment benefits

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.

 

Alimony

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.

 

Forgiven debt

 "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.

 

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 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:

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89Comments
Jan 8, 2013 6:42PM
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stop voting in lawyers, making  more laws for us and not them.
Jan 8, 2013 6:28PM
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Would everyone just shut up and give everything to the government. They could then give back what they think you need.
Jan 8, 2013 6:05PM
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The Republicans have sold our souls for there profit is what happened. Start with outsourcing jobs to 3 world countries.not to mention there good ole boys club the oil industry!
Jan 8, 2013 5:42PM
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What about the dump all on American shores tax free from any foriegn country why is that never addressed.

Jan 8, 2013 5:24PM
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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.

Jan 8, 2013 5:23PM
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gotta love WIKI

http://en.wikipedia.org/wiki/United_States_public_debt

Jan 8, 2013 5:18PM
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I have a chronic ilness and probably will never receive a check fron Social Security. I estimate that I have paid in approximately $650k in my lifetime. The Government has plenty of excess built into this program but like any thief, greed keeps them from doing the right thing with our money. Normally most tax payers never get back what they pay in so with this in mind, they are out-spending our lifetimes and always will. This will never be fixed but rather replaced in time with a Government program that will insist the Government will take care of you with health, housing, daycare, etc...just like in Europe. It's called Transformation and indoctrination into a Government controlled country. It takes years to implement here because we are used to having independent freedoms. It is now on a fast track to become reality within the next 10 years. Thank you Democrats and anyone else who voted for Hope & Change. I "Hope" you "Change" your minds during the next election which could very well be with Obama still running. The only ones who will not be affected will be the "Millionares & Billionares." 
Jan 8, 2013 4:45PM
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With the group of arrogant SOB's in Washington and the dumb SOB running the show we soon will all be paying with our blood and sweat to afford all the Government give-a-ways. Sorry only 53% of us will pay!
Jan 8, 2013 4:42PM
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Taxing Tax money is completely absurd
Jan 8, 2013 4:37PM
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Stop griping and pay your taxes.  It's the law.  If you cheat the government out of taxes then your a thief!  Go to jail.  You would be no different  than someone stealing from Wal-Mart.
Jan 8, 2013 4:35PM
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Oh yes we give, give, give so that our president can fly back and forth to Hawaii as much and as often as he likes. Like we getting in our car and drive to the store he gets to get in his jet and fly, fly, fly. Something terrible wrong with this picture. Hope all you that voted for him like what you see. Sadly most of you dont read or care whats really happening just that you get your check every month. God help us!
Jan 8, 2013 4:03PM
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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?

Jan 8, 2013 3:53PM
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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.

Jan 8, 2013 3:47PM
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SS is a tax, and thereby comes out of your "Gross" or pretax income.  It's basically a badly managed 401(k) that you HAVE to participate in. Government forcing you to "save" paying you interest, and taxing you on it.  But all of these years they get to use the money to feed tyrannosaurus debt.
Jan 8, 2013 3:36PM
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Come on MSN.  You act like you know what's going on with the obamacare plan.  I sure if you read the fine line on page 2023 you'll find that all main stream media's will be abolished.
Jan 8, 2013 3:33PM
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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.

Jan 8, 2013 3:31PM
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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. 

Jan 8, 2013 3:28PM
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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.

Jan 8, 2013 3:23PM
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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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