Smart TaxesSmart Taxes

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 3:23PM
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People need to wake up.The country/government is bankrupt.it'll be 17 trillion in june or july.The debt is growing at the rate of a trillion every 7 to 8 months.How much longer before everyone gets the freebees it's getting now.I say 5 to 10 years the most.There will be anarchy in the streets.

I see it coming.

Jan 8, 2013 3:09PM
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As far as I'm concerned, once you hit retirement age you shouldn't pay a dime in taxes on SS or investment income. But our government is so full of fat, over paid, under performing bureaucrats that the only direction our tax amounts will go is UP. We might as well stop pretending and go back to admit we're just this side of a medieval serf-based government. We do all the work and the government lets us poor serfs keep just enough to starve slowly on. Meanwhile they get nice and fat while we toil in the muck and mire until we drop.

Maybe if we stopped letting politicians make CAREERS out of politics we could get back to some form of government of the people and for the people. As long as politicians make their living solely through politics the working folks of this world are just going to be ground beneath their boot heels one tax dollar at a time.

Jan 8, 2013 3:07PM
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just listen to Obama, he wants more taxes and now that the rich pay more, who does he take it from now????????
Jan 8, 2013 3:05PM
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the goverment is addicted to money and wants more to help them spend less

now that makes lots of sense

Jan 8, 2013 3:04PM
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SS has been taxed for years see who started that one!!!

At most 50% could be taxed as that is the portion put in by the employer and not on your W-2

Jan 8, 2013 3:01PM
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The government has spent all of our money. They want it all to give to themselves. Who voted to bring Obama back because of his socialist ideals? There should  a flat tax, head tax anything that would give all Americans a chance to live, not in hunger or poverty.
Jan 8, 2013 2:59PM
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We would ALL be in the high stuff if we could just get inititive 28 going and put ALL ELECTED  "people" on medicare and social security PERIOD!!! They make enough on our dime to create their own savings without the like Clintons 5, yea count them five retirement plans... to say nothing of FREE medicle on again our dime.... AND sadly WE THE PEOPLE KEEP VOTING ALL THIS SCUM BACK IN !!!!
Jan 8, 2013 2:52PM
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WE ARE GOING TO BE TAXED FOR EATING AT HOME, THE MORE YOU MAKE THE MORE YOU PAY
Jan 8, 2013 2:45PM
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Let's face it...the Government wants ALL of your income and ALL of your wealth! They tax us when we make money..when we spend money..when we save it..even when we give it away! Tax tax tax. What the hell happened to this country??
Jan 8, 2013 2:30PM
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SS IS ALREADY TAXED AND NOW WE HAVE TO PAY AGAIN ON THE MONEY WE HAVE ALREADY BEEN TAXED ON

COMES FROM YOUR WAGES

Jan 8, 2013 1:47PM
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Unemployment in some states is actually called and considered insurance. Insurance payments are not subject to tax. Who has the balls to challenge that one?


Jan 8, 2013 1:45PM
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SS should not be taxed for anyone for any reason until after you have received back all that you have put in (and already paid taxes on).
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