With the holidays over, everyone is gearing up for the next season of the year: tax season. Tax law is very complex and can be difficult for even experts to negotiate. Often, surprises can creep up on unsuspecting filers. Here are five tax surprises you, hopefully, won’t encounter this season:
1. Employment Benefits: Unemployment is considered wage income and is taxable according to the IRS. When you apply for unemployment benefits, consider having your federal income taxes withheld. This is similar to a regular payroll withholding. In a case like this, the form is called a W-4V Voluntary Withholding Request which allows the taxes to be withheld at a rate of 7%-25% for each payment.
2. Alimony and Child Support: Alimony payments, maintenance payments, and other recompense from a former spouse are generally included in income by the recipient and deductible for the payor. To avoid a big bill at the end of the year, the recipient of the alimony can make payments to the IRS on alimony and other untaxed income via estimated tax filings. On the other hand, child support payments are neither included in income by the recipient nor deductible by the payor. Therefore, it is vitally important how payments are labeled in the separation or divorce decree in determining the tax consequences.
3. Forgiven Debt: Getting a credit card bill cut from $8,000 to $4,000 helps you but it can be considered a boon to the treasury. The general rule is that cancelled debt must be included in income. The amount you include in income will be sent to you and the IRS on a Form 1099-C detailing the discharge as miscellaneous income. However, cancelled debt can be excluded from income under IRS Form 982 if an applicable exclusion applies such as debt discharged in bankruptcy or insolvency. A notable exclusion is contained in the Mortgage Debt Relief Act of 2007. Some homeowners who are forgiven for mortgage debt won’t have to include the amount in income, saving a windfall in taxes. There are some restrictions though. A forgiven debt amount is limited up to $2 million or $1 million for a married person filing a separate tax return. Furthermore, the tax relief only applies to mortgages for primary homes discharged between 2007 and 2012 for primary homes, not secondary vacation homes.
4. Prize Winnings: Prize winnings are included in the long list of “other income”: which tax law considers taxable. This is not limited to cash rewards; it also includes the fair market value of any property you win. In most cases, the companies and groups that award the prizes will send a 1099 form declaring the value of what you won. If your tax return reports less than what the giver claims, under-reporting could result in an audit. Gambling proceeds count here as well, but the IRS does allow deduction of gambling losses up to the amount of gambling winnings.
5. Social Security Benefits: if you have retired and you’re lucky enough to consider Social Security benefits as additional income, they may be taxable under US tax law – in fact, up to 85%. To account for how much in taxes your SSI may cost, you’ll have to crunch some numbers on a work sheet found in your tax Form 1040/1040a. If you are unlucky enough to owe taxes on your SSI, there are two ways to pay. You can make estimated tax payments on the check amounts or you can elect to have the taxes withheld from your benefits by completing a Voluntary Withholding Request Form W-4V and filing it with the Social Security Administration.
Tax season can be tough on anyone and the attorneys of Merritt Webb are here to help. If you have any questions, be sure to contact our firm and we’ll do everything we can to help.