Surprise! These five items are taxable. Of course, you already know that wages and self-employment earnings are taxable, but what about the miscellaneous cash or other financial benefits you receive? If something valuable passes from one person to another, you know the IRS will consider it taxable.
Here are five taxable items that might surprise you:
1. Scholarships and financial aid. Applying for scholarships and financial assistance are top priorities for parents of college-bound children. But be careful — if any part of the award your child receives goes toward anything except tuition or fees, it might be taxable. For example, the award could include room, board, books, travel expenses, or aid received in exchange for work (e.g., tutoring or research). However, there are some circumstances where books and required supplies are not taxable.
Tip: When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to check state rules as well. Most scholarships and aid are tax-free.
2. Gambling winnings. The slot machine in Vegas paid out big time. But did you know that technically, all gambling winnings are taxable, including casino games, lottery tickets, and sports betting? Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keeping good records is essential.
Tip: You need to know when the gambling establishment is required to report your winnings. It varies by type of betting. For instance, the filing threshold for winnings from fantasy sports betting and horse racing is $600, while slot machines and bingo is $1,200. Beware, the gambling facility and state requirements may lower the limit.
3. Unemployment compensation. Congress gave taxpayers a one-year reprieve in 2020 from paying taxes on unemployment income. But unfortunately, the tax break was not extended by Congress for the 2021 tax year.
Tip: If you are collecting unemployment, you can have taxes withheld and receive the net amount or make estimated payments to cover the tax liability.
4. Social Security benefits. If your income is high enough after you retire, you could owe income taxes on up to 85% of the Social Security benefits you receive.
Tip: Consider if delaying when you start collecting Social Security benefits makes sense for you. Waiting to start benefits means you’ll avoid paying taxes on your Social Security benefits for now, plus you’ll get a more significant payment each month you delay until you reach age 70.
5. Alimony. Before 2019, alimony was generally deductible by the person making alimony payments, with the recipient generally required to report alimony payments received as taxable income. However, the situation is now flipped: For divorce and separation agreements executed since December 31, 2018, alimony is no longer deductible by the payer, and alimony payments received are not reported as income.
Tip: Alimony payments no longer need to be made in cash. Consider having the low-income earning spouse take more retirement assets such as 401(k)s and IRAs in exchange for reduced alimony payments. This arrangement would allow the higher-earning spouse to make alimony payments by transferring retirement funds without paying income taxes on them.
It’s always a good idea to keep accurate records so your tax liability can be calculated correctly, and you don’t get stuck paying more than what’s required. Check with us if you have questions.