Surprise! 4 things you didn’t know were taxable
Tax season begins in just a few months, which means there's precious little time left to prevent unwelcome tax surprises next April. For many people, the blow comes when they find out they have to report income they thought wasn't taxable — and then have to come up with money to pay taxes on it.
Here are four kinds of income that people routinely think they don't have to report, tax pros say, plus tips on how to do things, such as spreading out estimated tax payments, to avoid the related sticker shock when they file returns.
1. FORGIVEN DEBT
The surprise: A lender settles or forgives all or part of your loan or credit card balance, and in return you get a bigger-than-expected tax bill.
Why it happens: Generally, in the eyes of the
How to avoid sticker shock: Know the rules before you agree to any settlement or forgiveness. In some cases, the
2. UNEMPLOYMENT BENEFITS
The surprise: You collect unemployment from the state to help put food on the table after a layoff, but then the
Why it happens: Government unemployment benefits are taxable income. You'll get a Form 1099-G from the payer that shows how much you received. A copy goes to the
How to avoid sticker shock: Make quarterly estimated tax payments or have the payer withhold taxes on your unemployment checks. "This way you're not going to get killed at the end of the year. That helps a lot," Norris says.
3. PROCEEDS FROM A FUNDRAISING WEBSITE
The surprise: You start an online campaign to raise money for someone. The
Why it happens: If the online campaign account is in your name and it receives
How to avoid sticker shock: "Try to direct those funds to be issued to the intended beneficiary so you're not the one getting the 1099-K," she says. Ask the campaign platform how to do it.
4. DISABILITY INSURANCE BENEFITS
The surprise: You get hurt, and then the payments from your disability insurance policy end up hurting your wallet.
Why it happens: Disability insurance benefits can be treated as income depending on how you paid for the policy. "Normally it's not taxable (income) if you pay the disability premiums with after-tax dollars," Collado says. But if you paid for the policy with pretax dollars — as many people do if their employers offer disability insurance — you could end up owing taxes on the benefits if you make a claim.
How to avoid sticker shock: Have the insurance company withhold taxes on your payments, or make estimated tax payments yourself. Also, look carefully at the paperwork if you're signing up for disability insurance at work, and think about whether you're paying the premiums with after-tax dollars. "Otherwise, the disability benefits become taxable," Collado says. Instead, you could make estimated tax payments yourself. Or you could purchase the policy on your own.
This article was provided to The Associated Press by the personal finance website
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