Every April, Americans face the often-dreaded ritual of filing their taxes. The prospect of a larger-than-expected tax bill is one common source of anxiety, but so is the possibility of making a mistake that runs the taxpayer afoul of the IRS. Here are some things that many people don’t realize are taxable.
1. Unemployment income. Yes, the unemployment income you receive after a job loss is taxable. And unfortunately, this is one issue that will affect many 2020 taxpayers. You can elect to withhold taxes from your benefits, but if you didn’t realize your unemployment was taxable, you might be in for an unpleasant surprise when you go to file.
2. Gambling winnings. Even when Lady Luck shines upon you, Uncle Sam still wants a piece of the action. Whether your earnings are from online fantasy football or the racetrack, those earnings are, in fact, taxable.
3. Forgiven debt. You may be fortunate to have a creditor forgive your debt, but that goodwill also triggers a tax liability. From the point of view of the IRS (the only one that matters when it comes to taxes), you received income when that debt was forgiven. Therefore, that amount is taxable except under certain conditions, such as a bankruptcy ruling.
4. Social Security. Social Security benefits can be taxable depending on your level of income from other sources. If you want a smaller tax bill, you can elect to withhold taxes from your Social Security or make estimated payments on a quarterly basis.
5. Severance pay. After losing a job, you might be in for a little more bad news. If you receive a compensation package after separating from a job, your severance pay — just like the income you received from your employer — is taxable.
6. Freelance income. If you work a side hustle on Fiver or Upwork to help make ends meet, you’re responsible for taxes on that income just as you are for the money in your company paycheck. However, since most people have taxes withheld from their employee compensation, but not from freelance earnings, you may end up owing more than you expected on this type of income.
7. Profits on a sale. If you sell your rare Claude the Crab Beanie Baby for a profit, then you may be surprised to learn that you owe taxes on the profit you made — even if the sale was to a friend or family member.
8. Awards, prizes and contest winnings. Did you hit the Powerball jackpot or draw the winning ticket at the church raffle? You guessed it — those winnings are taxable in the eyes of the IRS.
Your individual circumstances may impact your tax liabilities, so always consult a qualified tax professional to see what qualifies as income in your case and what tax deductions you might be entitled to.