Think you have an idea of how much you’ll be getting back in your tax refund this year? Think again. There are several circumstances that you might not be factoring in to your potential refund that could cause it to be lower than expected. In fact, you might actually owe some money depending on where you’ve worked or personal changes you’ve been through in the last year. Here are some of the biggest tax surprises you could face and how to deal with them so that you don’t suffer any major losses.
If you’re divorced, you may think that you’re getting the better end of the deal if you’re receiving alimony. Though that may be the case, it doesn’t change the fact that you still owe taxes on the alimony you receive. Meanwhile, that same alimony is tax deductible for your ex-spouse.
Whether this seems fair to you or not, you need to plan ahead for paying taxes on the alimony you receive throughout the year. The best option to avoid a large lump sum tax bill is to pay estimated taxes throughout the year. You can actually set up an account online to make those payments directly from a bank account whenever you’re ready to pay.
Keep in mind that all spousal support, including alimony and separate maintenance payments, are all taxable. The one exception is child support, so it’s helpful if your divorce decree specifies amounts for each kind of spousal support – this will help you figure out how much you’ll owe in taxes on your alimony.
(Also read: Tips On How To File Taxes If You Get Divorced.)
If you collected unemployment benefits this year, you may be surprised to learn that this is considered by the IRS to be taxable income. Many people who’ve had to go on unemployment for months are hit with a huge bill come tax time, so it’s important to plan ahead if possible.
If you do collect unemployment, consider having 10% of each check surrendered to the IRS through withholding. It’s similar to the withholding process that you would have through a regular job except for the fact that this withholding process is voluntary. Ask the agency where you are receiving your unemployment checks from for a form to fill out to set up your withholding – usually, it is the W-4V form you’ll need.
Another alternative to withholding is to pay estimated taxes. This allows you to pay your tax bill in smaller chunks throughout the year rather than one big lump sum when you file.
(Also read: Tips On How To File Taxes When Unemployed.)
It’s a huge relief when you get a debt cancelled. However, that feeling can disappear if you’re unaware that that forgiven debt is actually viewed as earned income by the IRS. For example, if you get your credit card company to cut your debt down by $3,000, it means that you have to pay taxes on that amount in accordance with tax laws.
If you do have a debt cancelled, make sure you fill out a Form 1099-C (in many cases, the debt holder will send the form to you when the debt is forgiven). This is where you’ll list your discharged debt as miscellaneous income.
There are some exceptions to this rule, fortunately. For example, forgiveness of a mortgage debt may not be taxed for certain homeowners if the debt was discharged between 2007 and 2012. Talk to a tax professional if you’re not sure whether your cancelled debt will be taxed.
Social Security Benefits
If Social Security benefits are the only income you’re receiving, then there’s no tax surprise to worry about here. However, your Social Security benefits could be taxed if you continue to work or earn income elsewhere after you start getting those benefits. In fact, as much as 85% of your Social Security benefits could be taxed in this situation.
As with unemployment benefits, you have two options if you owe taxes on Social Security benefits. You can utilize voluntary withholding or you can pay estimated taxes throughout the year. To find out how much you’ll owe, use the worksheet in Form 1040 or 1040a.
(Also read: Things You Should Know About Social Security Benefits.)
Other Potential Tax Surprises
These tax surprises are not quite as common, but still important to be aware of:
- Prize winnings: The IRS views prize winnings, whether they are cash winnings or property, as taxable income. A 1099 form is usually used to declare the value of what you won. Be sure to be careful about reporting the proper value of noncash prizes as discrepancies can lead to an audit.
- Gambling proceeds: Money you win from gambling is also taxable. However, you also get to subtract betting losses from your winnings.
- Life insurance policies: If you are the beneficiary of a substantial life insurance policy and you were not a spouse, then estate tax rules could apply to the benefits you received.
- Long-term disability coverage: This may or may not be taxed depending on several factors, including how much of your income it is replacing and who is paying the premiums.
To make a long story short, it’s much better to be aware of these little-known tax rules than to be surprised by a substantial tax bill in April. Use these tips to help pay down taxes you owe throughout the year so you don’t end up having to pay interest and other fees while repaying a lump sum later on.