That is the question.
Whether ‘tis nobler to the IRS to suffer the penalties and payments of outrageous fortune, or to take deductions against a sea of troubles, and by opposing reduce them: to file, to wait no more; and by filing, to say we give up the refund, and the thousands of forms that earnings are heir to?
Alright, after that butchering of Shakespeare (it was so fun to write though!), let’s get back to the question, which is: What’s taxable and what is not?
There are many kinds of things that people are unclear on the taxability of. Here’s a few of the most commonly confusing items, starting with the more boring items and finishing with the most interesting ones.
- Child Support: For child support payments, the person that earns the money and pays the child support pays the income tax also. The person that receives the child support does not have to pay income tax on that money.
- Alimony: So, the person that receives the alimony is taxed on that money as income, and it is deductible to the person that pays it. There’s even special lines on the normal 1040 form to report it as income or expense: lines 11 and 31a. Alimony is basically the opposite of child support, with regard to who owes taxes on what.
- Unemployment compensation: Unemployment compensation is usually taxable income, but some people are confused because there was a recent federal law that temporarily made unemployment non-taxable during the economic downturn. However, that was just a temporary thing, and unemployment is once again taxable.
- Jury Duty: Pay from jury duty is basically the same as the rest of your pay. Except that it’s from being on a jury. Hope you had an interesting case!
- Life Insurance: First, if someone close to you has died and that’s why you’re looking up this particular point, our condolences to you. Generally, life insurance payouts are not taxable but there are a couple of significant exceptions that can lead to the need to pay taxes on some or all of the insurance payment, so you should check with an accountant, especially if the payout is a cash lump sum or if there are installments that are being paid to you over time.
- Legal Settlements: Legal settlements are one of the most complicated subjects being addressed on this list, and there isn’t an easy way to tell if income is taxable or not. Seriously, if you’re getting a settlement, talk to your lawyer about it, and then talk to an accountant about it. This paragraph is not and should not be construed as actual legal advice. All that said, in many cases, if a settlement is intended to compensate someone for lost wages or some other taxable money, the settlement is also taxable.
- Free Services: Services, even if it’s your brother-in-law the terrible plumber helping you with a clogged drain, technically should be reported as income to the IRS. If you’re swapping services with someone, basically bartering, then what you spend on materials is still considered allowable business expenses that you can deduct.
- Prizes: Prizes from just about any source should be considered taxable income. Even if you don’t know the value exactly, you’re expected to report the fair market value on your tax returns. This means game shows, the lotto, casinos, even gas station scratchers, and even those “gift” bags that celebrities get at award shows. This might not be obvious when someone wins because most people pay payroll taxes on their paychecks and they don’t understand that the giant check doesn’t have taxes withheld on it. If you’re going to protect yourself from that insane tax bill at the end of the year though, you’ll need to set the money aside for taxes when you win! Just try to do it while concentrating on the winnings and not the taxes.
- Illegal Activities: The most interesting entry on this list, the IRS still requires criminals to pay taxes on their “illegal activities.” Famously, it wasn’t Al Capone’s many murders on which he was convicted to Alcatraz, it was tax evasion because he wasn’t paying taxes on all the illegal money he was making in 1920s Chicago. It’s the job of the IRS to make sure you pay, not to make sure that you go to jail for something that doesn’t involve taxes. In their eyes, it’s worse if you don’t report something expensive that you stole than the actual crime of stealing. So remember criminals, report stolen items at their market value on the date that you stole them, record illegal income so it will be taxed, and send in your return on time!
As noted above, some of these areas can be complicated to figure out, and we recommend talking to an accountant if you have any questions or uncertainty. Speaking of which, Tardy & Co., PC is an accounting firm that does tax preparation, so you could talk to us! Except about that last point, which we don’t want to know about, can’t help you with, and definitely don’t endorse!
Tags: shakespeare, weirdly funny