A commentary by EXIT Realty Corp. International’s Vice President, Regional Service, Laura Roussel, CPA.
As the tax deadline in the U.S. (April 18th this year) is fast approaching, I thought it might be helpful to note some unique types of income that people sometimes fail to recognize as being taxable income and therefore fail to report on their tax returns.
If you were out of work this past year and received unemployment compensation, those benefits are fully taxable. You should have received a 1099-G from your state showing the total benefits you received for the year, but even if you did not receive the form, you are required to report the income.
While child support payments are not taxable to the recipient (nor deductible by the payer), alimony on the other hand is taxable to the recipient. For this reason it is important to distinguish between the two types of payments in your divorce or separation agreement.
If you received money from the settlement of an accident this past year to compensate you for physical injuries or illness, the settlement is tax free. However, if you received any punitive damages, that part of the settlement payment is taxable. In addition, if you received an award or settlement that replaces taxable wages or income, or for damages related to discrimination, breach of promise, invasion of privacy, libel, slander, defamation, or harassment, then such award would also be taxable.
Tips are taxable income, the same as your wages. You are also responsible for paying Social Security and Medicare taxes on your tips. If you are in the restaurant industry and you earn $20 or more in tips in any month, the IRS requires you to report those tips to your employer. Your employer is supposed to give that information to the IRS and adjust your wages to cover withholdings. If you fail to do this (and get caught) the IRS may charge you a penalty equal to 50% of the Social Security and Medicare tax you failed to pay. If your tips total less than $20 per month, you don’t have to report them to your employer, but you’re still required to pay taxes on them on Form 4137.
Even found property that was lost or abandoned is taxable at its fair market value in the first year it’s your undisputed possession. The precedent for the IRS’s “Treasure Trove” rule dates back to 1964.
If you received a scholarship to cover college tuition, fees, and books, you don’t have to pay taxes on the money. But if your scholarship also includes room and board, travel, and other expenses, that portion is taxable.
Gambling and lottery winnings, proceeds from wagers (including events sponsored by charities), as well as comps from casinos are taxable. You may deduct your gambling losses on Schedule A, but only to the extent of your gambling income. Travel expenses are not deductible for nonprofessional gamblers.
Prizes and awards are taxable at their fair market value.
If you negotiated with your credit card company or another business to reduce the balance you have to pay them, then you have cancellation of debt (COD) income. If you had a short sale or foreclosure on a piece of real estate and you were personally liable for the debt (recourse debt) associated with that property, you also would have COD income. Cancellation of debt normally results in taxable income, but there are some exceptions to the rule such as Title 11 Bankruptcy, insolvency (but only to the extent insolvent), qualified farm indebtedness, qualified real property business indebtedness, or qualified principal residence acquisition debt. This is a very complicated issue and I highly recommend consulting a tax professional for advice.
In summary there are many types of income beyond wages, interest, dividends and retirement distribution that are taxable. To be sure you include them all, and for any other questions, always consult a tax professional.