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 16, 2013 1:59AM
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we'er cattle. we're all branded. from birth. until we die. try to erase that number and see if you have any luck.
Jan 12, 2013 1:42PM
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President Obama, nutty Nanci Pelosi, the worm Harry Reid and the rest of the liberal left figured out long ago that if you want to stay in office, give the people something for nothing, the same visceral characteristic that keeps a gambler at the table, and they have "succeeded."  They have demonized success, impoverished half the country, and alienated those of us who wake up, (before noon) every day and work hard for a better life for our family, just to see our money sent to Washington to be squandered on yet another mindless program.  Let me be clear, the Republicans are not much better, but their ideals are for the most part a little farther removed from the left's socialist agenda.  The bottom line is,  we passed the Fiscal Cliff a long time ago.  With 16 plus trillion in debt and racing faster than Brent's heart watching Miss Alabama, we are beyond the point of no return.  We borrow around 40% of what we spend.  If by some magical swipe of the wand we woke up one day and said "no more", we will live on a balanced budget, and 40% of services, programs, government jobs, etc. were cut, imagine what would happen.  There would be chaos the level of which this country has not seen since the Civil War.  It is tough to take back a gift that has been given; however, we must, for the sake of survival, restore common sense and individual responsibility back to our society and then demand that our elected officials do the same.  I fear we are way too late.

Jan 10, 2013 12:58PM
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We... as a country... One Nation... Under GOD!! Thats right I said it... GOD, NOT Government!! We need to wake up, as a whole people, They are trying to tax us to oblivion, to pay for their mistakes, and mis-spending, and they want to take away everyones guns, so the people are COMPLETELY reliant on the government... for EVERYTHING!! We need to do something, and FAST! Seems to me I've read this story before... (Boston Tea Party anyone?) It doesn't end well for the government if the people band together as one, and JUST SAY NO!!! Eventually history WILL repeat itself. and lead to another American Revolution... everyone has a line, and I think most of us are fast approaching it. If you aren't approaching yours, then you aren't paying attention.
Jan 9, 2013 7:46PM
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And don't forget they all just got a raise and it cost the american people 4 million to send obama and his family on vacation
Jan 9, 2013 6:56PM
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It hurts and it is disappointing that our government cheats us this way.
Jan 9, 2013 5:12PM
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Fear mongers and speculaters. Thats why gas goes up a quarter / down a penny and Sunnis and Shiites cant get along?
Jan 9, 2013 1:31PM
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you have to understand pyscology here. a polititians wet dream is to spend unlimited amounts of money that is not theirs and to have the power of life and death over everyone. is this not the ultimate power trip? is it not power that these people relish/seek?
Jan 9, 2013 1:26PM
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how about some transparency from the s.s. admin? what is the average benefit payment? what is the average duration of that benefit?  recently read a yahoo post that claimed the average benefit is payed out in a less than 3 year timeframe. have no idea if this is true but if the average joe is paying in for 25 years you can see how its all stacked in the governments favor.
Jan 9, 2013 12:02PM
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My bad. Should have read $165k. That being said, you show a far left liberal tone in your response. Didn't know that a team of MSN liberals were scrutinizing all of these responses. Maybe you should look into the ones that reflect your values as closely. No fair and balances there. Thank you.
Jan 9, 2013 9:04AM
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my husband is retired if i make 44M this year 85% of his ss is taxable to me(married filing joint is 44m this year)

 

so i have to pay more in to be able to pay his taxes or i can file married filing sep. and lost benefits

no senior should have to pay on  ss unless they work and match their ss and the spouse shoud not have to pay either.   we are hard on all seniors that have worked for their money.

 

if a person dies before 65 and has not wife or children why can't ss pay for their funeral the person has paid enough in if the they have worked for 25 or more years....

 

we need to look at seniors so could be independent if not for insurance payments and medical needs and housing that they can't afford.....

Jan 8, 2013 9:52PM
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Check this out:  I make over $400k in wages.   Obama's higher taxes plus my State income taxes take almost 60% of everything I make over $400k.   It takes cash away that I need to operate my small business.   So, quit whining about paying an extra 2% in FICA tax.
Jan 8, 2013 8:56PM
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our wonderfull government, makes you wish you were gay so you could enjoy getting ****ed in the ****
Jan 8, 2013 8:46PM
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You pay taxes on everything except the air you breathe, I think that the congress and senators should only be allowed to serve 2 terms and that's it.
Jan 8, 2013 8:37PM
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It is to bad that our federal legislative bodies can not get past  their fifth grade mentality of who is going to rule the school yard play ground.
Jan 8, 2013 8:04PM
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I have paid into SS for the last 30 years, and have paid taxes on that income already. Just because I have a retirement income from my employment should not mean that I have to pay taxes again on that same money when I start collecting it. Our government, and I say our because we are to blame for what is happening, is keeping us from prosperity. We voted these people into office and when we had the chance to correct our mistake what did we do ? Voted them back in!!! We need to wake up and demand that the government stop this uncontrollable spending. Everytime we turn around the governement dips into our pockets and takes a little more. Pretty soon we have nothing. Oh wait, that has already happened!!! Of course thats what they want, you to have nothing, that way they control all of you!!!!
Jan 8, 2013 8:01PM
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    REVOLUTION.  We ,the American people, did it before WE can do it again .  Big corporations get tax breaks and We get our **** broke///////
Jan 8, 2013 7:39PM
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I have paid into ss for the last 30 years. Paid taxes on all of it already. Now because I have a retirement from my employer im going to be taxed on MY ss!!! Bull....! When will we as american citizens realize that our government is keeping us from prosperity. We have only ourselves to blame for what is happening. We voted these people into office and when we had the chance to vote them out, what did we do? We keep bring them back!! Rise up America and demand a stop to all the government spending and maybe you will be able to keep your hard earned money!!!
Jan 8, 2013 7:29PM
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QUIT BITCHING ABOUT OUR GOVERNMENT AND START DOING SOMETHING ABOUT IT!! AFTER ALL THE SO CALLED AMERICAN PUBLIC MUST WANT IT, YOU IDIOTS VOTED FOR IT!!!! TWICE!!! SO YOU DESERVE TO GET IT DONT YOU!! I HOPE YOU ALL GET MORE THAN YOU DESERVE. I HAVE NO MORE SYMPATHY FOR YOU STUPID IDIOT LOOSERS THAT VOTED FOR IT!!!
Jan 8, 2013 6:57PM
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Just yesterday I got a nasty surprise from a realtor. We WERE considering renting out our primary residence and buying a smaller home. According to the tax info I obtained, If we rent out our home the property tax will increase by more than $3500.00 per year.  We will not be moving or increasing our income by owning a rental home. The taxes are too burdensome for our budget. 
Jan 8, 2013 6:49PM
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The federal government needs to take even more of our money because they know how to spend it wisely whereas we the money earners do not.  Look, there are always things we can give up in our lives;  the fee for the kids to play soccer, a baseball glove for the kids, taking the cat to the vet when sick, going out to dinner, a new car, new carpet for the house, fixing the leaky roof etc.  Hey, if you can't live on what you get paid after the gov't takes what they consider their fair share, just cut back some more.  It should make you feel good that you are paying for an illegal aliens health care or education, or a vacation villa for some South America despot socialist.  As Obama said, "this is probably the new normal".
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