These Items May Not Seem Taxable, But They Are
Taxes are complicated, with nitty-gritty details that hardly anyone is aware of. For instance, did you know the buried treasure you found in Grandpa’s backyard is actually taxable? That's just the start. Read on to learn about surprising taxable items.
Whether they are things you receive, cash you earn or money you don't have to pay back, these assets are taxable:
- When it comes to reporting your taxes, the IRS wants to make sure you pay your fair share - and that means reporting certain items that may seem surprising.
- Gifts over $15,000, items exchanged as barter, forgiven debts, and gambling winnings are among some of these items.
- While many of these circumstances are unusual or infrequent, if you don't know about them you can get caught owing back taxes.
1. Certain Large Gifts
Get out your calculator and a diagram of your family tree, because this one can get a little complicated. Generally, a gift has to be fairly large before the IRS takes notice, and gifts between certain people or institutions are never taxed, regardless of size. For example, monetary transfers between a husband and wife and direct payments to a medical or educational institution are never taxable.
Monetary gifts over $15,000 (as of 2019) to children are taxable. However, this amount can be increased if the gift-giving is done strategically. Let's say Mom and Dad want to gift as much as they can to their son and daughter-in-law. They can give up to $60,000 before the gift tax kicks in. How? Dad can give a $15,000 gift to each half of the younger couple and Mom can do the same (4 x $15,000 = $60,000).
2. Bartered Items
It would seem bartering would not be taxable since money is never exchanged, but that is not always the case. It depends on the value of the items being bartered and whether or not the items bartered would normally earn the giver any income. For example, if you and your neighbor take turns watching each other's dogs while the other person is on vacation, you don't have to claim it on your taxes because you both received something of equal value and neither of you is in the animal boarding business. However, if you do an hour’s worth of your neighbor's yard work in exchange for him helping you set up your website, which is what he does for a living, the IRS says you have to report the market value of the service on your tax return.
4. Forgiven Loans
In most cases, the money you end up not paying because a loan is forgiven has to be reported as income, whether it is forgiven by a private company, such as a bank, or the federal government. This is something many people who decide to take advantage of debt settlement are not aware of. There are some exceptions, though, such as a loan being forgiven by a loved one—that counts as a gift. Also, forgiven debt may not be taxed if it is part of a bankruptcy, insolvency or primary mortgage debt.
5. Illegal Activity
If you earn income from illegal activity, technically you have to report it. That includes selling drugs or extorting money. This probably has the distinction of being the least-followed tax rule in the book.
6. Scholarships and Work Study
If you receive a scholarship that pays for anything other than tuition, fees and books, you have to pay taxes on it. Work-study income will also be taxed, although not always at the state level.
7. Unemployment Income
How much tax you will have to pay on unemployment income depends on which state you live in. The federal government counts unemployment income as taxable income, but not all states do the same. To minimize the pain at tax time, you can have taxes deducted every time you receive an unemployment payment instead of having to pay it all at once.
If you earn money from renting out your room or house for more than 15 days, you have to pay taxes on that income. As the personal rental industry continues to grow and gain recognition, expect this rule to be more strictly enforced.
9. Presents from Your Boss
If your employer gives you a $500 bonus, it's automatically taxed. But what about other gifts? An engraved name tag doesn’t count, but a season pass to your local basketball team is another story.
10. Selling Gametes
If you offer your eggs to an infertile couple, you have to pay taxes on the amount you received for them. Men aren't off the hook, either—they have to report income they receive from donating their sperm.
The Bottom Line
Chances are, you haven't experienced most of these situations. But you've probably run into at least one, and you never know which tax gaffe is going to lead to a full-blown audit. "I didn't know" is hardly ever a justifiable excuse, and it's especially true during tax season. Don’t gamble with your financial future just to save a few bucks. Follow the rules and avoid getting on the bad side of the IRS.