Everyone knows that wages are taxed by the federal government, but Uncle Sam has a far-reaching definition of “taxable income.”
It covers numerous types of earnings that many people don’t realize are subject to federal income taxes.
Following are several examples of taxable income that may come as a surprise.
1. Social Security retirement benefits
Generally, people pay federal income taxes on their benefits if they have other substantial income — such as wages, interest or dividends — as we detail in “5 Ways to Avoid Taxes on Social Security Income.”
If Social Security benefits are your sole source of retirement income, or you have little income in addition to your benefits, your benefits likely would not be subject to federal income taxes.
For divorce and separation agreements executed before 2019, alimony is generally deductible by the payer, and the recipient generally must report it as (taxable) income.
That changed for agreements made or modified after Dec. 31, 2018, though. Under the Tax Cuts and Jobs Act of 2017, such alimony payers cannot deduct payments — meaning they now effectively pay taxes on that money — and alimony recipients do not count payments as income.
3. Alaska Permanent Fund dividends
A few years ago, when we named Anchorage, Alaska, among the best domestic retirement destinations, we mentioned the Alaska Permanent Fund:
“Yes, it may be cold, and, yes, it may be expensive. But once you’ve been a resident for a year, you may be entitled to receive the annual dividend from the oil-revenue-supported Alaska Permanent Fund.”
In 2021, the fund paid $1,114 per person.
Fail to report Alaska Permanent Fund dividends on your federal tax return, and you may be hit with a negligence penalty or other sanctions, the state agency warns.
The IRS expects people to report income from bribes on their tax returns.
“If you receive a bribe, include it in your income,” the federal agency plainly states in Publication 17.
5. Canceled debts
If you were fortunate enough to convince someone to cancel a debt recently, you probably felt a sense of relief. The problem is that you may not be entirely off the hook.
Generally, if a debt is forgiven — unless it’s intended as a gift — the IRS expects you to count the canceled amount as income when you file your federal taxes.
6. Income from illegal activities
Even criminals are expected to report their income — including income from illegal activities, such as earnings from selling illegal drugs.
Don’t scoff at the thought. Remember, notorious Chicago gangster Al Capone finally got significant prison time for tax evasion.
7. Gambling winnings
The euphoria you feel when you win at gambling may quickly fade once you realize that the IRS expects you to pay taxes on your windfall.
And this isn’t only about what happens in casinos. Winnings from lotteries and raffles also must be reported to the IRS as income.
You can, however, use gambling losses that occurred during the same year as your winnings to offset your tax burden.
You cannot avoid paying taxes by accepting goods or services instead of cash for your work. Generally, you must include the fair market value of those goods or services in your income.
9. Stolen or found property
If you steal someone’s property, you must report the fair market value of the property in the year of your thievery.
Yes — really.
However, the IRS gives you an out: Return the property to the owner in the year you steal it, and Uncle Sam will let you avoid the tax.
If you find someone’s property and keep it, it is “taxable to you at its fair market value in the first year it’s your undisputed possession,” the IRS says.
10. Free tours
If a travel agency organizes a group of tourists and offers you a free tour, you must include the value of the freebie in your income. So, report the tour’s fair market value unless in the trade or business of organizing tours.
Doesn’t seem so “free” anymore, does it?
11. Jury duty pay
Those who have sat on a jury know that the pay for doing so is pretty skimpy. The low remuneration is particularly disappointing if you are self-employed and do not expect to earn any job-related income while performing your civic duty.
But the federal government doesn’t much care about your plight. It still generally expects you to fork over your share of taxes on the meager pay you take in.
Take a kickback, side commission, push money or similar payment, and you must report it as part of your income. Even if you are self-employed, this is true — simply report it on your Schedule C.
Maybe the act of paying taxes on the kickback will soothe your conscience somewhat.
13. Strike and lockout benefits from unions
Unions often pay benefits to workers who are on a strike or are on the wrong end of a lockout. If you are the beneficiary of such largess, you must report both cash and the fair market value of other property.
The only way to avoid this taxation is when “the facts clearly show that the union intended them as gifts to you,” the IRS says.