When you think of taxable income, the first things that come to mind are most likely wages, including self-employment income, and perhaps capital gains and interest income.
As you prepare your taxes, however, you may discover additional types of taxable income that could take you by surprise.
Check to see if any of the following types of taxable income apply to you.
Unemployment income
Unemployment income has not always been taxable. However, it is now, so be sure to plan for it. To help avoid a surprise once you file your tax return, you can choose to have income tax withheld from your unemployment checks.
Gambling Winnings
Gambling winnings have always been taxable, but it’s something we don’t often think about.
Unfortunately, its typical for anyone who gambles to end up with more losses than wins, and that makes it easy to assume unremarkable gambling wins don’t affect your tax return. But the truth is they can.
The IRS has gotten tougher about proving your losses in recent years. You must keep records to show how much you wagered and lost. And as always, your losses must be in the same year as the gains you want to offset.
Furthermore, you can’t just report your wins minus your losses. Gambling wins are reported on line 21 – Other Income on your Form 1040.
Your gambling losses, up to the amount of your wins, are reported as Miscellaneous Deductions with the rest of your itemized deductions. Reporting your losses as part of your itemized deductions may help to reduce the taxable amount of your gambling earnings.
Social Security benefits
Before 1983, filers had to pay taxes on the wages they earned but didn’t pay tax again when they received Social Security benefits based on those wages. However, times have changed. Today if you have income over certain limits, you will pay tax on up to one-half of your Social Security benefits.
Capital gains from mutual funds
When you buy shares of a mutual fund, you may not expect to pay capital gains tax on those shares until you sell them.
However, the mutual fund buys and sells investments on your behalf. When the mutual fund has capital gains, they are passed on to you and may be subject to tax. This is true even if you choose to reinvest in more fund shares.
Be sure to increase your tax basis by the gain on which you pay tax, so you don’t pay tax on the same income again when you sell mutual fund share.
Fortunately, you don’t need to worry about capital gains from mutual funds you hold in a tax-deferred retirement account.
Forgiven debt
It’s hard to pay tax on income you never saw, but that’s exactly what you may end up doing if you have forgiven debt.
Here’s how it can happen: You have credit card debt that has built up over the years. You hit hard times, perhaps long-term unemployment or a serious illness, and you can’t pay your credit card bill.
The bank may write off your balance, forgiving your debt.
You didn’t see a check in the mail, but in the eyes of the IRS, you received income when your debt was forgiven. That forgiven debt is taxable unless you qualify for an exception, such as bankruptcy or insolvency.