5 Terrible Tax Suprises
Essex & Associates:: www.essexinc.biz April 11, 2011
Greetings!
You'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.
1.) Yes, it's true. Under tax law, unemployment compensation is considered wage income and the IRS wants a cut of it.
2.) 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 (insert your own description here) ex-spouse are completely warranted. They also are completely taxable.
The one good tax surprise here is for the ex who's paying spousal support. Those check amounts are deductible.
3.) "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.
4.) 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 just limited to cash awards. You have to pay taxes on the fair market value of any property you win.
5.) You spent the last 40 years fattening the U.S. Treasury thanks to those persistent 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?
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 percent of those government checks could be subject to tax.
Don't be surprised by taxes. Consult with a professional.
Wishing you many happy returns,
Wayne
Wayne T. Essex Ph.D.
Essex & Associates
Tax, Accounting, HR, Payroll
7501 Paragon Road
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