The government canceled your student loan. A lawyer helped negotiate a lower balance on your debt obligation. You received a generous settlement at the conclusion of a lawsuit. You paid low insurance premiums through the Health Insurance Marketplace.
Good news, right? Maybe. Maybe not. Stay tuned. What was a pleasant surprise may come with an unpleasant surprise at tax time. The IRS has some surprising rules when it comes to taxable income. Here are a few unusual cases.
Found Money
If you stumble upon money, like discovering cash in an old couch you bought on craigslist, the IRS considers it taxable. Found property is considered taxable income too. For instance, if you found a gold bracelet, you’d owe taxes on the fair market value—the reasonable expected price of the item in its current condition—of the bracelet at the time you found it.
If you eventually sold that gold bracelet, however, you would only be taxed on whatever profit you make, not on the entire value of the bracelet, because you claimed that when you initially paid taxes on the find.
Bartering
Bartering is a time honored practice that is finding new life in turbulent economic times. Whether it’s goods or services, and whether it’s through craigslist, swap meets, word of mouth, or an organized barter exchange, bartering can save money and connect you to your community.
Not surprisingly, the IRS wants to be part of that community too. If you trade goods or services instead of paying cash, the value of what you receive is considered taxable income.
Illegal Activities
Income from illegal activities, such as theft or drug sales, must be reported to the IRS. Really? This rule raises obvious questions, but it actually exists and was used to bring down mobster Al Capone. In the 1930s, after prosecutors were unable to bring down Capone on charges of murder and bootlegging, they successfully convicted him of not filing income tax on millions of dollars in ill gotten gains.
Gambling Winnings, Prizes, and Awards
Whether it’s a lottery win or a lucky night at the casino, gambling winnings are taxable, regardless of the amount. However, if you itemize your deductions, you can claim gambling losses as a tax deduction. Similarly, if you win a car, a vacation, or even a cash prize in a contest, it’s considered taxable income.
Forgiven Debt
In general, forgiven debts are treated as income subject to taxes. The IRS says “In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.”
For forgiven amounts over $600, lenders must submit IRS Form 1099-C to declare “loan forgiveness.” It includes the type of debt that was canceled, the amount of the debt, and the date that the debt was forgiven. “The taxpayer then keeps this money, so it’s considered income,” the IRS says. Therefore, the 1099-C must be reported on the tax return.
Settlements
If you received money from a lawsuit settlement, a check from your insurance company after a car accident, or a severance check from your employer, you might find yourself with a corresponding tax bill.
Unemployment benefits
Unemployment benefits, although they are meant to help, are taxable by the federal government. Most states collect taxes on unemployment benefits, as well, although some don’t. However, unlike regular wage income, you won’t have to pay Social Security or Medicare taxes on your unemployment benefits.
Health Insurance
Speaking of unemployment, if you had reduced health insurance premiums through the Health Insurance Marketplace because you were out of work or couldn’t get affordable insurance any other way, you could be in for a nasty surprise at tax time.
If you underestimated your yearly income when applying for Marketplace insurance—perhaps because you got a job or your income increased later in the year—you may owe the federal government for a portion of those benefits.
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