Most of us are used to the idea of paying taxes on earned income. After all, if you earn a wage, or if you have business income, it makes sense to pay income taxes on it.
However, there are some items of financial import that you might be surprised to learn are taxable. Here are 5 things that you might pay taxes on:
1. Unemployment Benefits
Common sense might indicate that you shouldn’t pay income taxes on unemployment benefits – after all, you don’t have a job. However, these benefits are still a source of income for you, and the government takes back some of what it is giving you.
For those who find a job rather quickly, this isn’t as big a deal. However, if you are unemployed long-term, or if you made just enough at the beginning of the year – before you lost your job – to ensure that you will owe taxes, this can be a real hit to your finances.
If you don’t want an unpleasant surprise at tax time, you can specify, when you apply for benefits, that you want taxes withheld. It means a smaller check, but it can prevent you from trying to come up with what you owe come April 15.
2. Forgiven Liabilities
If a creditor forgives your personal loan, for example, that is considered income. So, if you have $20,000 in credit card balances, and the credit card company forgives $12,000, your income is increased by that amount. You might not actually have the cash in hand, but you are still taxed as if you do.
One recent exception is with mortgages. Normally, your forgiven mortgage would be considered income, but that rule has been suspended during the last few years. Congress extended the exclusion through 2013, but might not do so again.
3. Non-Money Prizes
A few years ago, Oprah made big news when she gave away cars to members of her audience. Then, more news was made when the recipients found out they had to pay taxes on the car. A prize, such as a car or other non-money item, is considered windfall income (to the tune of cash value) and is taxed as such. That means that if you win a $20,000 car, it looks like income, and can even bump you into a higher tax bracket. Many taxpayers have a hard time dealing with these higher taxes since it they don’t have the ready cash to pay what’s owed.
It’s true that you can take deductions for certain education expenses, and even claim credits. But you also have to report scholarships you earn as income. The good news that you don’t have to pay taxes on scholarship money that is used for tuition, books, required fees, and supplies. But if some of that scholarship money is spent on travel, living expenses, or unnecessary expenses, that money is subject to income tax.
5. Gifts You Give
When you receive a gift, you don’t have to pay taxes on it. However, if you give a present, you might be on the hook for taxes. So, you pay taxes on the money when you earn it and then pay taxes again if you give it to someone else. The good news is that there are exclusion rules. You are exempt from paying the gift tax if you keep it to $14,000 per person during 2013.