Quick: Name all the products and services that charge you taxes.
Most likely, your answer misses the whole picture.
“The average American thinks he’s only taxed on what he gets a 1099, K-1 or a W-2 for,” says Mark Alaimo, a certified financial planner with at Wealth Management Advisors LLC in Boston, Mass. “What’s taxable income for you goes far beyond that – and can get you into a lot of trouble if you don’t pay the taxes owed.”
To be safe, assume any income you receive is taxable, unless the IRS specifically says otherwise. Here are 10 items that people are often astonished to discover are taxable. If you earned money from any of these sources last year, you’ll need to add it on your tax return:
1. Social Security. This one can be a shock for those who recently started drawing benefits. Why doesn’t the government just give less in the first place? The reason: You don’t automatically pay taxes on all your Social Security. How much you pay depends on your total income.
For your 2013 taxes, if half of your Social Security income plus all your other income totaled between $25,000 and $34,000 as a single filer, then you may pay tax on half of your Social Security benefit. If that amount is more than $34,000, you could owe taxes on as much as 85 percent of it. If you’re married and filing jointly, the income thresholds are between $32,000 and $44,000, and greater than $44,000. Depending on where you live, you could owe state taxes on Social Security as well.
2. Unemployment benefits. Surprise. Although you were unemployed, your unemployment checks, both federal and state, are treated just like wages. So they’ll be taxed at graduated rates. It’s a good idea to withhold a percentage of your benefits to cover these taxes so you aren’t slapped with a huge bill at tax time.
3. State Income Tax Refund. If your state withholding is $100, but you only owed $85, then you’ll pay taxes on the $15 check from the state (if you itemize your deductions).
4. Winnings. Any winnings – whether from church fairs, gambling, Super Bowl pools, or getting a car from Oprah – are taxed, though the money you put in or what you lost is not taxed. If you’re at a casino, whatever you lost for the year can offset your taxable winnings, as long as you can prove it.
If you purchase a $100 raffle ticket as part of a school fundraising event and then win the $10,000 prize, you owe taxes on $9,900. The rate you pay depends on the rest of your tax profile. If you’re a casino regular, you can request win-loss statement from the casino to offset your winnings.
5. Alimony. Payers of alimony get a deduction on what they paid, but recipients pay taxes on what they received at their marginal tax rate. Child support payments are not taxed.
6. Most Rental Income. Almost all rental income, whether it’s from Airbnb or from a vacation home, is taxed, although you can deduct the portion of expenses your renters don’t pay. If renters stay for 90 days, or 25 percent of the year, and don’t pay for the water bill or Internet or insurance or any other household expense, you can use 25 percent of those bills to offset your rental income. One exception to the rental income rule: If you rent a personal home for fewer than 15 days, you don’t have to pay income tax on that income.
7. Cancellation of Debt. Let’s say you took out a $100,000 loan to start a business that later failed. If the bank writes off your debt because you’re unable to repay the loan, the balance of the loan is considered income by the IRS, unless you declare bankruptcy, says Drew Porter, a certified public accountant at Bay-Area firm Commyns, Smith, McCleary, Deaver LLP.
8. Barter Income. In today’s sharing economy, this kind of transaction is becoming more popular. Maybe you’re an accountant in the market for a Louis Vuitton bag. If you spot someone offering one on a barter site like Tradeya.com and that person needs a room painted, you can initiate a barter in which you paint their house and receive the bag in exchange.
Here’s where the taxes apply: If you trade a good or service that you would have made a profit on in the open market, you have to pay taxes on the estimated profit. So in the above example, if you would have normally charged $100 to paint a room, but the cost to you is $60, you owe taxes on the $40 profit.
9. Crowdfunding. This is still a gray area, since the IRS has not definitively stated how they’ll treat this type of income. “It’ll take either the IRS issuing specific regulations or a big enough case where the IRS investigates someone who may have been too aggressive,” Alaimo says.
What it boils down to is intent – and for that reason, there’s a conservative way to treat such funds on your tax return and an aggressive one. The conservative one would be to treat any crowd-funded earnings as taxable income. (If you raise $20,000 in credit card transactions, then like anyone else processing that amount of money via credit card, you’ll be issued a 1099-K that will definitely put you on the IRS’s radar.)
The aggressive approach, which some might take, especially if they pull in less than the $20,000, is to treat the money as a gift. If a crowd-funding campaign does not have the characteristics of a sale (i.e., if person raising money does not give anything back to the giver), then it could be treated as a non-taxable gift, much the way a friend might buy you a coffee.
10. Bitcoin. The rules around the virtual currency are still pretty murky, but at this point, it’s being treated as a capital asset, which means any gain or loss will be treated as capital gains or capital losses, Alaimo says.
If you engage in Bitcoin mining, however, in which you answer math questions in order to win Bitcoin, then that is taxed as ordinary income, like other winnings.
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