Do I owe tax on this? Five surprising taxable items – The Ukiah Daily Journal
Wages and self-employment income are taxable, but what about random monetary or financial benefits you receive in other ways? If something of value changes hands, you can bet the IRS is considering a way to tax it. Here are five taxable items that might surprise you:
Scholarships and financial aid
Applying for scholarships and financial aid is a top priority for parents of children attending college. But be careful – if part of the reward your child receives is for something other than tuition, it could be taxable. This could include room, board, books, travel expenses, or help received in exchange for work (eg, tutoring or research).
Tip: When you receive a reward, review the details to determine if any part of it is taxable. Be sure to also check the state rules. While most scholarships and aid are tax-exempt, no one needs a tax surprise.
Hooray! You have reached the trifecta of the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets, and sports bets. Fortunately, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.
Tip: Know when the gambling establishment is required to report your winnings. This varies depending on the type of bet. For example, the deposit threshold for winnings from fantasy sports betting and horse racing is $600, while slots and bingo are usually $1,200. But beware, the gambling establishment and state requirements may lower the limit.
Congress has given taxpayers a one-year reprieve in 2020 from paying taxes on unemployment income. Unfortunately, this tax relief has not been extended for the 2021 tax year. So, unless Congress passes legislation extending the 2020 tax relief, unemployment will again be taxable from your 2021 tax return.
Tip: If you’re on unemployment benefits, you can either have the taxes withheld and receive the net amount, or make estimated payments to cover the tax payable.
Social security benefits
If your income is high enough after you retire, you may have to pay taxes on up to 85% of the Social Security benefits you receive.
Tip: Ask yourself if delaying when you start collecting Social Security benefits makes sense to you. Waiting to start benefits means you’ll avoid paying taxes on your Social Security benefits for now, and you’ll receive a larger payment each month you delay until you reach age 70.
Prior to 2019, alimony was generally deductible by the person making the alimony payments, with the recipient generally required to report the alimony payments received as taxable income. Now, the situation is reversed: for divorce and separation agreements signed since December 31, 2018, alimony is no longer deductible by the payer and alimony received is not declared as income.
Tip: Child support payments no longer have to be made in cash. Consider having the low-income spouse take more retirement assets such as 401(k)s and IRAs in exchange for reduced child support payments. This arrangement would allow the highest-earning spouse to make child support payments by transferring retirement funds without paying income tax.
When in doubt, it’s a good idea to keep accurate records so that your tax liability can be calculated correctly and you’re not stuck paying more than is required.
James Angell is a Certified Public Accountant based in Willits. His office is located at 461 S. Main St. and he can be reached at 459-4205.