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.
What follows 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 Paying Taxes on Your Social Security Benefits.”
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.
As of January, the average monthly benefit for retired workers was about $1,464 — for a total of $17,568 per year. That’s well below the taxable threshold for individual tax-return filers — whose benefits are taxable only if what the Social Security Administration calls their “combined income” is between $25,000 and $34,000.
2. Alaska Permanent Fund dividends
When we named Anchorage, Alaska, among the best domestic retirement destinations of the year, we mentioned the Alaska Permanent Fund.
“The 25 Best Places in the U.S. to Retire in 2019” explains:
“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 2018, the fund paid $1,600 per person. However, that’s not the only reason to retire to Anchorage.”
But dividends for adults, and sometimes dividends for children, are subject to federal income taxes, notes the Alaska Department of Revenue.
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.
4. 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 was imprisoned for tax evasion.
For divorce and separation agreements executed before 2019, alimony is generally deductible by the payer, and the recipient generally must report it as income.
This changes for agreements executed after Dec. 31, 2018, though, notes H&R Block. Per changes to the tax code from the Tax Cuts and Jobs Act of 2017, alimony payers cannot deduct payments, and alimony recipients will not count payments as income.
6. Canceled debts
If you were fortunate enough to convince someone to cancel a debt in 2018, 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.
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.
An example from the IRS:
“You’re a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them.”
How many of these things did you realize were taxable? Let us know by commenting below or on our Facebook page.