Found a Hidden Fortune? Prep Yourself to Pay Taxes on It!
We already know that wages are taxable. Even more, some of you might be even aware that some investment income is taxed, as well. However, the IRS won’t stop there. If you picked up more money, whether it’s by luck, skill, or even criminal activities, there’s a big chance you owe some taxes on that money, too.
If you want to avoid being caught off guard when you have to file your return, we made a list of things that are actually taxable. So if you find any item on this list that you have, make sure you declare it on the next tax return:
You might have a scholarship that’s supposed to cover your tuition, fees, and all the needed books. In this case, you’re not obliged to pay taxes on the money. However, if your scholarship also covers room and board, travel, and other expenses, that particular portion of the award is still taxable.
Students who have access to financial aid in exchange for work, like serving as a teaching or research assistant, also have to pay tax on the money, even if the proceeds are used to pay tuition.
Sometimes, what happens in Vegas doesn’t have to stay in Vegas. When we’re talking about gambling income, we mean winnings from lotteries, horse races, casinos, and sports betting (such as fantasy sports).
The payer has to issue a Form W2-G (which can later be reported to the IRS) if they win $1,200 or over at bingo, but also on slot machines, $1,500 or more from keno, and over $5,000 from a poker tournament, and $600 or more from any other wager, as long as your part is 300 times more the amount of the bet.
The good news is that if you decide to itemize, your gambling losses are also deductible, but as long as you don’t report your winnings as your income. For example, last year you won $4,000 and reported $5,000 in losing bets. In this case, your deduction for the losses will be limited to $4,000.
Deducting the balance against other income isn’t possible. The state you live in might want a piece of that action, too. Your home state will tax all your income, which includes gambling winnings. You also need to watch for the tax bill, in case you place a winning bet in another state. Luckily, you won’t be taxed twice.
Tons of Americans have received unemployment compensation throughout the pandemic, and many of them for the first time. While these benefits are extremely important when you have to go through tough times, they might also produce an unexpected tax bill.
Unemployment benefits are still a form of income, and this income is usually taxable at a federal level. In some situations, state taxes apply to unemployment benefits, too. Of course, state treatment varies, so check out the rules in your state.
According to the IRS, unemployment compensation applies to any amounts received under federal or state unemployment compensation laws, which includes state unemployment insurance benefits.
Try not to get too excited if there’s a credit card company that tells you there’s no need to pay off the rest of your balance. The reason for that is that if the debt is canceled or discharged for less than the amount of money you owe, it’s because it is considered to be taxable income.
This can apply to credit card bills, car loans, mortgages, or any other debt you owe whatsoever. If, for example, your bank says you don’t have to pay $2,000 out of the $6,000 you still owe on a loan, you have a $2,000 cancellation of debt income that you have to report the next time you file for a tax return.
However, there are some exceptions to the rule, like student loans, debts that are discharged in bankruptcy, qualified farm indebtedness, and other types of debt. In the case of a “nonrecourse” debt, which is where the lender can take back from you any collateral property you failed to pay, but you aren’t personally liable for unpaid debt, then any canceled debt isn’t seen as taxable income.
If you have a debt that’s been forgiven, the credit might send you a Form 1099-C, that shows the amount of canceled debt. The IRS should also get a copy of the form, so don’t think Uncle Sam won’t find out about it!
Have you recently robbed a bank? If the answer is yes, then the IRS expects you to pay your taxes on the proceeds! “Income that comes from illegal activities, like money from dealing illegal drugs, should be included in your income” according to the IRS. Bribes are also taxable!
However, few criminals actually report their ill-gotten gains when they file tax returns. Even so, if they manage to get you, the feds might add tax evasion to the list of charges against you. That’s what happened to the famous gangster Al Capone, who did 11 years for…tax evasion. Capone never filed any tax return, according to the IRS.
Back in September 2020, a man discovered a 9-carat diamond in the Crate of Diamonds State Park in Pike County, Arkansas. It was the second-biggest diamond that has ever been discovered, and it was worth more than $1 million.
However, if you manage to find a diamond in the rough, or a cache of gold coins in your backyard, the IRS will want a piece of the cake, too. Found property is taxable for its fair market value during the first year, according to IRS.
The precedent for the IRS’s “love treasure” dates all the way back to 1964, when two people discovered $4,467 in a used piano they bought for $15. The IRS declared that the couple should have paid income taxes on the money, and the U.S. District Court agreed.
Gifts from your employer
Usually, gifts aren’t taxable, even if they’re worth a lot of money. However, if your EMPLOYER gives you a brand new set of golf clubs as a reward for a job well done, you will probably have to pay taxes on the value of your new irons.
Over 50 years ago, the Supreme Court decided that a gift received from an employer can be excluded from the employee’s income, only if it’s made with “detached and disinterested generosity”. Gifts that are meant to reward an employee for his or her services don’t qualify. Gifts that are made to promote the company don’t qualify, either. While we’re on this matter, if you receive a gift from your boss that you don’t really like, here’s something you can get for them!
Even if you can use bitcoin to get a variety of goods and services, the IRS sees bitcoin, like any other cryptocurrency, as an asset. If the bitcoin you used to buy something is worth more than you paid for it, then you’re expected to pay taxes on your profits at the capital gains rates, the same way you would do with stocks and bonds.
The more cryptocurrency increases, the more attention it gets from the IRS. For example, since 2019, the tax agency has been sending all kinds of letters to people who didn’t report transactions in virtual currencies.
Besides that, the 2021 Form 1040 includes a line, where taxpayers are questioned if they received, sold, sent, or exchanged any financial interest in a virtual currency during the tax year.
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