Have you ever wondered if some gifts, income, or services that you received or won, are taxable? You might be surprised about what’s taxable and what’s not. The tax codes can be a bit confusing at times. Here is a list of some of the most common things that confuse some of us.
Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received. This area has been a major surprise to contestants on game shows and celebrities who have received large gifts at celebrations like the Academy Awards.
Free services. Under IRS barter regulations, free services are almost always taxable as ordinary income. You should report the fair market value of services received as income on your tax return. However, if you exchange or barter your services, you can deduct allowable business expenses against the value of services received.
Legal settlements. As a rule legal settlements are considered by what the settlement replaces. If the settlement revenue replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and usually requires a detailed review.
Life insurance proceeds. Usually, life insurance proceeds paid to you because of the death of an insured are not taxable. However, there are a number of exceptions to this general rule. For example, if you receive benefits in installments above the value of the life insurance policy at time of death, or if you receive a cash payout of a policy, you could have taxable income.
Jury duty pay. Yes, doing your civic duty is taxable as ordinary income.
Unemployment compensation. Unemployment compensation should be reported as taxable income.
Child support. Child support is not taxable to the person who receives it on behalf of their dependent. It is also not deductible for the person who pays it.
Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it. Special rules apply. Make sure you have proper documentation as part of a divorce decree to ensure you can support your tax position.
Illegal activities. Even income received from illegal activities is taxable income and must be reported. Incredibly, the IRS even states that stolen items should be reported at the fair market value on the date the thief stole the item. Though, they don’t get many takers for this tax.
Figuring out what’s taxable or non-taxable can sometimes be complicated. At Summit CPA we offer multiple resources to assist you with all of your tax and financial planning needs. Contact our office at 866-497-9761 to schedule an appointment with our advisors.