Uncle Sam want a cut of every dollar you earn; that’s a given. However, you may be surprised to learn that the IRS considers a lot of things taxable income, even if you don’t. Come tax time, you could be in for a big surprise when you calculate taxes owed.
Here are a few examples.
Millions of people are out of work and out of income, so the last thing on these people’s minds maybe filing their income tax returns. Unfortunately, the federal tax law treats unemployment benefits as taxable income. On the other hand, unemployment insurance benefits are not taxable by the State of California.
Originally folks relate “income” as money you receive. So it may be a surprise to many people that IRS considers canceled or forgiven debt taxable “income”. For example, if you have negotiated a settlement of your credit card debt with your credit card company, the amount of the debt forgiven is known to IRS as discharge of indebtedness income, and it is taxable.
There are exceptions to this rule. If the discharge of indebtedness occurs in a bankruptcy or when the taxpayer is insolvent, the amount does not need to be included in the gross income. Also, debt forgiven by a mortgage lender on the taxpayer’s primary residence whether through mortgage restructuring or foreclosure is also excluded through 2012 under the Emergency Economic Stabilization Act.
Debt forgiveness is reported to the IRS by the lender using Form 1099-C, Cancellation of Debt.
On the flip side, recovery of a previously written off bad debt is also taxable.
Scholarships and Fellowships
If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.
If you are a candidate for a degree, you generally can exclude from income that part of the grant used for:
- Tuition and fees required for enrollment or attendance, or
- Fees, books, supplies, and equipment required for your courses.
You cannot exclude from income any part of the grant used for other purposes, such as room and board.
Awards, Prizes, and Winnings
Awards, prizes, and contest winnings are all considered income by the IRS, even if no money changes hands. If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include the prize in your income. Prizes and awards in goods or services must be included at their fair market value.