“Do I really have to pay taxes on that?”
No one likes to be surprised by the IRS, so here’s your chance to brush up on non-traditional income sources that are often mistakenly assumed to be tax-free. The chances are high that you or someone you know have received income from at least one of these sources in the last year. Read on to discover how much you know about the tax law and how it applies to you and your loved ones.
Unemployment Benefits vs. Covid-19 Stimulus Checks
Yes – Unemployment benefits. Yes, you do owe taxes on unemployment benefits that you may collect. With an unprecedented number of Americans using unemployment benefits because of Covid-19, questions surrounding unemployment benefits and taxes have never been more widespread. These benefits are taxed just like income you receive from any other employer.
No – Covid-19 stimulus check. What about the stimulus check you received? According to the most recent sources, the stimulus check is not taxable. It should not be included in taxable income on your IRS tax forms. The IRS does not consider stimulus money as income. In addition, the stimulus check will not reduce your tax refund, if you should qualify for a refund.
Alimony vs. Child Support
Yes – Alimony. Alimony, or the monetary provision given to support a spouse after a divorce, is considered taxable income by the IRS. In other words, if you collect alimony, you will need to pay tax on this money as if it were money that you earned from a traditional source such as an employer.
No – Child support. Child support is the monetary provision given to a caregiver to provide for the children after a divorce. It is intended to provide financial support to the divorced spouse for some of the costs associated with raising a child. Child support is not taxed. In other words, if you collect child support, this money is not part of your taxable income.
Gifts, Prizes, and Bonuses
Yes – Bonuses. Bonuses from employers are included in your W-2 Form and are considered part of your annual taxable income.
No – Non-cash gifts or awards from employers. You do not owe taxes on non-cash gifts or awards from an employer that cost the employer less than $1,600. For example, you don’t need to pay tax on the bottle of wine (or all-expense-paid trip) that you received as Employee of the Month.
No – Gifts from family. You do not owe income tax on gifts that you receive from family and friends, whether cash or non-cash. If the gift is valued at over $15,000, the gift-giver would need to register the gift with the IRS because it will count toward the gift-giver’s lifetime gift exclusion. The gift-giver may or may not be responsible for paying taxes on the money given, but the gift-recipient is not required to pay taxes on the gift received.
No – College tuition received. If your parents or grandparents pay for your college education, this monetary gift is not considered taxable income. The IRS will not collect taxes on this money. To avoid the tax regulations around gifts, the payments must go directly to the educational institution rather than appearing in your bank account. Interestingly, this tax exemption is not limited to children or blood relatives of the gift-giver. College tuition paid directly to the educational institution is not taxable income for the recipient, no matter how the recipient is related to the giver.
No – Medical payments received. The regulations around the payment of medical bills are similar to the regulations around college tuition. If you are the recipient of money that is transferred directly to a medical institution to pay your medical bills, you will not owe money on this income.
No – Gift from a spouse. A monetary gift from a spouse to another is not taxed. Your spouse can give you as much as she or he wants, and you won’t need to pay taxes on a dime of it.
No – Inheritance. You don’t owe money on any inheritance you receive. The person’s estate pays any applicable taxes before the estate pays any heirs (recipients). If you have received either money or property as part of an inheritance, you can assume that any taxes have already been paid on this inheritance. Do not include the inheritance you receive as part of your annual taxable income.
Gambling and the Lottery
Yes – Gambling winnings. Tax law mandates that individuals pay taxes on annual gambling winnings that exceed gambling losses.
Yes – Lottery winnings. See above.
Odd Jobs, Bartered Services, and Garage Sales
Yes – Cash income. It doesn’t matter to the IRS if you get paid in cash, with a credit card, or with a regular, directly-deposited paycheck. Cash income is subject to the same tax laws as regular direct deposits from a large company. It is an urban myth that paying for odd jobs in cash makes the income nontaxable.
Yes – Bartered goods or services. Bartered goods or services received in the place of money are taxable. Tax law mandates that bartered goods and services that are received by a taxpayer must be transformed into a fair market value (in dollars), and that taxes must be paid on that fair market dollar amount. For example, if a pianist trades weekly music lessons to a friend in exchange for the friend managing a rental property, then the pianist must pay tax on the fair market value of the property management services she receives.
No – Garage sale income. Garage sales, by common definition, are the sale of items that are used or pre-owned. Items at a garage sale sell for less than the seller’s investment in acquiring them. Therefore, income gained from garage sales is assumed to be less than the money invested in acquiring the items in the first place and is not considered by the IRS to be part of annual taxable income. However, if you start making soap or cakes or anything else in your garage and selling these items at a profit, then these “garage sale” gains would be considered taxable income.
Disability, Combat, and Court Awards
Yes – Disability benefits. If your employer paid the disability insurance premiums, then you will be tax-liable for any payouts you get from a disability policy.
No – Disability benefits. If you paid the disability insurance premiums yourself, then you will not be tax-liable for payouts from a disability insurance policy.
No – Combat pay. This monthly stipend for members of the Armed Services who are serving in designated hazardous zones is not subject to income tax.
Yes – Court awards. The IRS includes any court awards for lost pay or business damages as part of your annual taxable income.
No – Court damages. The IRS does not include any monetary payouts that you receive through court-ordered remuneration for damages you may have received, such as emotional distress, sickness, pain, or suffering.
This article has covered only a few of the many questions that face Americans when it comes time to file taxes. To avoid paying more taxes than you owe (or the fines associated with paying fewer taxes than you owe), seek the advice of a qualified tax professional in your area. And if you are behind on your taxes, call The Tax Defenders today. Our tax resolution specialists can help you settle your debts with the IRS in the most financially advantageous way.
