The IRS is the undisputed overlord of tax collections. Pay up, pay the right amount and pay on time, or you’ll be hit with penalties and interest that compounds daily. There’s the normal stuff you have to pay taxes on like W-2 income, self-employed income, and capital gains when you sell investments for more than you paid. The IRS has quite a list of things that are taxable. Let’s break them down into the Surprising list and the Just Plain Crazy list.
Surprising Things that are Taxable
Social Security Benefits
It’s true. Almost 60% of people who receive Social Security have to pay taxes on it.
- If you’re single and your combined income is between $25,000-$34,000 you’ll have to pay income tax on up to 50% of your benefit.
- If you’re single and your combined income is more than $34,000, you’ll pay income tax on 85% of your benefit.
- If you’re married filing a joint return and combined income is between $32,000-$44,000 you’ll pay income tax on up to 50% of your benefits.
- If you’re married filing jointly and combined income is above $44,000, you’ll pay income tax on 85% of your benefit.
Unemployment Benefits
It’s a quote directly from the IRS code book. “You must include in income all unemployment compensation you receive.”
If you received unemployment, you’ll get Form 1099-G that lists how much you received which is the amount you have to report.
Strike and Lockout Benefits from Unions
In the same vein, if you go on strike or you’re on the wrong end of a lock and receive money from your union, it’s taxable. You have to report both cash and the fair market value of anything else you received.
The IRS says the only way to avoid taxes on said income is when “the facts clearly show that the union intended them as gifts to you.”
Alimony
For divorce and separation agreements executed before 2019, alimony is generally deductible for the payer and the recipient generally must report it as taxable income. That changed for agreements made or modified after Dec. 31, 2018.
The Tax Cuts and Jobs Act of 2017 eliminated the deductibility of alimony payments by the payer, so that person now has to pay taxes on it. The alimony recipient no longer has to report the alimony payment as income.
Gambling Winnings
You went to Las Vegas. You hit it big. You’re on top of the world. But according to the IRS, that’s income. You also have to report winnings from lotteries and raffles. You can use gambling losses to offset your winnings if the losses happened in the same year you won. But the offset is only possible if you itemize.
Bartering
For centuries people have swapped something they do with someone else with a different skill. There was a handshake and they both walked away happy. Today, the IRS rule is that you have to pay taxes when you accept goods or services instead of cash for your work. You have to include the fair market value of those goods or services in your income.
Canceled Debts
If you had some debts cancelled, you breathe a sigh of relief because those debts are gone, right up to tax time. If a debt has been cancelled, unless it’s intended as a gift, the IRS requires you to include the cancelled amount as income when you file your taxes that year.
Scholarships and Work Study
If you receive a scholarship that pays for anything more than tuition, fees and books, you have to pay taxes on it. Work-study income will also be taxed. It’s in the IRS Code, Topic No. 421 Scholarships, Fellowships, Grants, and Other Grants.
Jury Duty
You’ve been called to perform your civic duty and serve on a jury. For that, you get paid a meager amount that may pay for gas. But the federal government isn’t concerned about that. You have to list it as income.
Free Tours
If a travel agency organizes a trip and offers you a free tour, you have to include the fair market value of the trip as income.
Just Plain Crazy Things that are Taxable
So, what makes the remaining items crazy. Because you have to ask the question, “Does the IRS really think they can collect on these.”
Bribes
IRS Publication 17 clearly states, “If you receive a bribe, include it in your income.
Income from Illegal Activities
Criminals are expected to be honest citizens and report their income from selling illegal drugs, running guns, embezzling money or robbing banks. Here’s the quote from the IRS, “Income from illegal activities, such as money from dealing illegal drugs, must be included in your income.” I know, I know. Al Capone got busted for tax evasion.
Kickbacks
If kickbacks, money under the table or side commissions find their way to you, it’s reportable income. Even if you’re self-employed, just list the kickbacks on Schedule C.
Stolen Property
If you steal someone’s stuff, you must report the fair market value of what you stole. Yes, it’s true. The IRS does give you an out though. Return the property to its rightful owner in the year you steal it and no tax is due.
Found Property
In September 2020, a man found a 9-carat diamond in the Crater of Diamonds State Park in Pike County, Arkansas. It was the second-largest diamond ever found in the park and could be worth more than $1 million.
But be aware that if you find a diamond in the rough, unearth a cache of gold coins in your backyard or discover sunken treasure while deep-sea diving, the IRS wants a piece of your booty. “Found property is taxable at its fair market value in the first year it’s your undisputed possession.”
The precedent for the “treasure trove” rule dates back to 1964, when a couple discovered $4,467 in a used piano they purchased for $15. The IRS said the couple owed income taxes on the money, and a U.S. District Court agreed.
Selling Gametes
Gametes are the reproductive cells of an animal or a plant. Every year women are paid to donate their eggs to infertile couples. According to Egg Donation, Inc, a company that matches donors with couples, those payments fall into a range from $6,500 to $30,000. Those payments are taxable as income according to the U.S. Tax Court. Fertility clinics typically send donors and the IRS Form 1099 listing how much the donor received.
Sperm donors also have to report income they receive from donating sperm.
Nobel Prize
And if you are fortunate enough to win a Nobel prize, yes you will have to pay up on the $1.1 million you receive. If you’re a journalist and win the Pulitzer Prize, it’s the same story.
The only way to avoid a tax hit is to direct the money to a tax-exempt charity before you receive it.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
