After days of research of decoding the IRS and its tax regulations, you are bound to get the feeling that you have mastered everything. But understanding the US tax law is not as easy as it sounds and throws you surprises every now and then. Some of these surprises are bound to shock you as well. Since it is the tax season and we take it upon us to let you get ready to know these surprises and prepare yourself well in advance:
- Unemployment benefits: Well, this is one that you can’t imagine. You have to pay taxes on the unemployment benefits that you receive from the government. The government considers these benefits as wage income and thus it is taxable. To avoid paying a hefty unmanageable amount at the end of tax year, it is better to fill estimated taxes. You can even fill the federal W-4V form or Voluntary Withholding Request form to withhold your federal tax from the benefits.
- Alimony: A divorce can’t get any bitter. You not only end up ending your marriage but pay up a large part of alimony as taxes too. The amount that you receive as alimony for the spousal support is taxable while the part that is for the child support is tax free. Making estimated tax filings also help you in managing your finances at the end of the year. The only breather is for the ex-spouse who is paying the alimony as it is tax free for him.
- Forgiven debt: Rude it may sound but true it is. The government considers the forgiven debt as your income and taxes you for it. So if a creditor agrees to write off your debt, expect him to send a tax form stating the amount forgiven and describing it as your miscellaneous income.
- Prize winnings: When you win a prize, you are surely lucky, and so is the IRS because it is also going to get a part of it. Money coming in the form of prizes is included as other incomes in your total income and is completely taxable. Even if your prize is not in the form of cash, you are bound to pay taxes on the estimated value of the goods or property that you receive as prize. You also have to pay taxes on your net income from gambling. By net income we mean your winnings minus your losses.
- Social security benefits: The US government taxes you for the social security benefits that it offers to you upon your retirement. If you don’t have any other source of income other than social security benefits and are living only off it, you are exempted from taxes but if you have one of the other source of income, your social security benefits will be taxed. All these details are to be entered in form 1040 or 1040a-whatever is applicable for your case. Paying estimated taxes also help in this case. You can also fill form W-4V and request for Voluntary Withholding Request for the amount of your taxes.
There are several such glitches in the US tax law which perplex the US citizens and certainly make it one of the most bizarre tax laws in the world.