Did you know the buried treasure you found in your grandparent’s backyard is actually taxable? That's just the start. You may be surprised to learn that the following 10 items are taxable, whether they are things you receive, cash you earn, or money you don't have to pay back.
- 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.
- As of 2022, gifts over $16,000 ($17,000 in 2023), items exchanged as barter, forgiven debts, and unemployment income 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
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. Monetary transfers between spouses, for example, and direct payments to a medical or educational institution are never taxable.
Gifts up to a certain value per donee per year are subject to the annual exclusion. The amount is $16,000 for the 2022 tax year and $17,000 for 2023. However, this amount can be increased if the gift-giving is done strategically.
Spouses can each give a gift to the same person, doubling the gift: This means that each may give $16,000, together giving $32,000. This amount increases to $34,000 in 2023 ($17,000 for each spouse).
Let's say two parents want to gift as much as they can to their child and their child's spouse. In 2022 the parents can give up to $64,000 before the gift tax kicks in. How? One parent can give a $16,000 gift to each half of the younger couple and the other parent can do the same (4 x $16,000 = $64,000).
2. Bartered Items
It might seem like 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 those items 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 your neighbor helping you set up your website, which is what they do for a living, the IRS says you have to report the market value of the service on your tax return.
Alimony or separate maintenance payments are no longer deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018. These changes were among the many enacted under the Tax Cuts and Jobs Act (TCJA). Payments initiated before 2019 are not affected.
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 instances in which you are not required to pay tax on a forgiven loan, 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.
Scholarship and work-study income may be taxable if the recipient reaches the reporting threshold for income, which in 2021 is $12,550 or less.
7. Unemployment Income
How much tax you have to pay on your unemployment income depends on the state in which you live. The federal government counts unemployment income as taxable income, but not all states do. To minimize the pain at tax time, you can have taxes deducted every time you receive an unemployment payment instead of having to pay them 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 person, you have to pay taxes on the amount you received for them. Sperm donors also have to report any income they receive from donating their sperm.
How Much Is the Gift Tax?
The gift tax is only triggered on annual gifts above a certain amount—$16,000 in 2022 and $17,000 in 2023. The gift tax rate is based on the size of the taxable gift and ranges between 18% and 40%.
Is Unemployment Income Taxed?
Yes. Unemployment benefits are treated as ordinary income by the federal government. And as of 2022, only 5 states that levy an income tax exempt unemployment from state income taxation (California, New Jersey, Oregon, Pennsylvania, and Virginia). In addition, 9 states do not have an income tax at all, and so they do not tax unemployment at the state level either (Alaska, Florida, New Hampshire, Nevada, South Dakota, Texas, Washington, and Wyoming).
Is Alimony Tax Deductible?
The Tax Cuts and Jobs Act (TCJA) eliminated the tax deduction for alimony payments. This applies to divorce agreements executed on or after Jan. 1, 2019.
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.