Crazy Taxes on You

We all know that Uncle Sam takes a share of our earnings, but have you considered other events in the past year that you may owe taxes on? You might be surprised.

Consult a tax professional for advice on your personal situation.

  1. You Caught a Baseball

You are the lucky fan who catches a historic home run ball from the outfield bleachers. The not-so-lucky part? The IRS could hold you responsible for the resale value of the ball as soon as it hits your glove — even if you weren’t planning to sell it.

  1. You Found a Pile of Gold

You finally found the cache at the end of the rainbow. Or maybe you found a stash of rare baseball cards hidden in the wall of your home during a remodel, or a treasure chest while scuba diving in a shipwreck. Under the same regulation that applies to the baseball, the treasure trove rule, that windfall is taxable to you in the first year that you find it. Sadly, this means that you may be forced to sell all or part of your find to pay the tax.

  1. You Held Up a Bank or Liquor Store

It doesn’t matter if you got it illegally: Stolen money or property should be reported, lest a tax evasion charge be added to your legal woes when you get caught. Says the IRS, “If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner.”

  1. You Accepted a Bribe or Kickback

The IRS is blunt on this one: “If you receive anything of value, include it in your income.”

  1. You Dealt in Illegal Goods

If you made money dealing drugs or by any other illegal form of self employment, the IRS requires you to report it on Schedule C.

  1. You Hit the Jackpot

Yes, you have to pay taxes on your lottery prize. Yes, if you have been buying lottery tickets all year, you can also deduct the expenses. But you have to keep a diary of wins and losses, and the IRS has specific instructions on how to do that.

  1. You Win a Prize

It’s estimated that Michael Phelps will owe $55,000 to the IRS on his Rio winnings — the medals and the cash prizes that come with each are taxable. Many other Rio champions will get off scot free, however. That’s because Congress recently passed a law to exempt Olympians from “victory taxes” — but only for athletes who earn a million dollars a year or less. Phelps earned an estimated $12 million in endorsements alone in 2016, so he doesn’t get that break.

  1. You Got a Grant

It would feel great to win $500,000, or the $1 million that comes with the Nobel Prize. That good feeling won’t protect you from the tax bite, though. You’re required to pay taxes on all such awards — unless you have them directly transferred to a recognized charity. That’s what President Obama did with his 2009 Nobel Peace Prize winnings.

  1. You Are Gifted

Usually, the presents you unwrap over the holidays come to you tax-free, but there are some exceptions. Cash or a gift card from your boss is taxable as a fringe benefit. A hostess gift you receive as a thank-you for having a sales party in your home is taxed as miscellaneous incomePersonal gifts, though, are generally safe from the tax man.

  1. You Collected Rent on Your Pad

Just like regular rent payments, money you earn by hosting guests is counted as part of your gross income. The exception: You don’t have to pay if you live in the home and rent it out for two weeks or less per year.

  1. You Got Your Social Security Check

It may seem nonsensical that the government pays people and then collects tax money on those payments, but that’s how it goes. However, SSI, or disability benefits, are not taxable.

  1. You Divorced Well

Alimony you receive from your ex is taxable income, but child support payments are not. For this reason, it’s important to know how payments are categorized in your divorce settlement. Review your divorce decree or ask your attorney.

  1. You Won a Scholarship

If you win a grant that covers your tuition and books, that’s tax-free. But if it pays for room and board or travel, pay up.

  1. Your Fantasy Football Team Won the Super Bowl

If you win at least $600 worth of cash and prizes from a business operating a fantasy sports league, they’ll file a 1099-MISC with the IRS. But even if you win less or your league is informal, you are still supposed to pay on your winnings.

  1. Triple 7s Came Up

Just like with the lottery, the IRS gets a cut of your casino winnings once they surpass the amount you document losing. Usually it’s a flat 25%.

  1. You Spun the Wheel of Fortune

It’s simple enough to pay the tax if you win a cash prize, but if you win a car or vacation, you still owe tax on its value — which can be tough to pay if you didn’t also win cash. Because of this, it’s often wise to take the cash equivalent of a prize if offered.

  1. Your Debt Was Forgiven

The IRS is very specific about this: If a debt is cancelled as a gift to you — for example, if Grandpa says, “Merry Christmas, you no longer owe me for that time I bailed you out!” — you don’t have to pay taxes. Otherwise, you do.

  1. You Traded a Haircut for Cigarettes

This may surprise you, but if you receive goods or services in exchange for services you render, the IRS expects you to include the value of those in your gross taxable income.

  1. The Boss Lets You Take the Company Truck Camping

If you drive your company car to work and home, or use it on weekends, this is a taxable fringe benefit and you should be tracking and reporting your personal miles.

  1. Your Bitcoins Doubled in Value (investments)

Bitcoin is a virtual currency that is represented by computer code, but it can be used to buy real goods and services. So of course, the IRS considers gains in this or any other virtual currency taxable. It’s considered a capital asset like stocks and bonds, so if you buy Bitcoins low and sell them high, the difference is your profit. But it can be even more complicated than that: If you create new Bitcoins by mining, you have to count those as income, too.

  1. You Got a Freebie

If a widget maker sends you their SuperWidget 2000 to review and you get to keep it, you just received a taxable payment. However, you don’t owe taxes on the market value of the product — just what the company agrees it’s worth. Make sure to put an agreed-upon value in your contract.

  1. You Sold Stuff on eBay

If you occasionally sell your kids’ outgrown clothes on eBay, you won’t owe taxes because you most likely took a loss on the items. But if you create a resale business on eBay, you better believe you have to report your profits.

  1. You Had a Yard Sale

Like eBay, most yard sale transactions are not income producers, but if you’re one of those people who holds a sale every weekend and resells stuff at a profit, do the right thing.

  1. You’re a Child Entrepreneur (at any age)

Starting a small business, whether it’s dog walking or selling handmade items, can be a great activity for a tween or teen. But don’t expect them to be IRS-exempt just because they’re kids. If the business earns more than $400, file a tax return. Hobby income is also taxable (see your tax advisor)

  1. You Set Up a GoFundMe Campaign

This is one of those tricky gray areas. If you start a crowdfunding benefit for someone in need, the donations should be considered personal gifts. But if the gifts run into the large numbers, the crowdfunding site may file a 1099, reporting the transaction to the IRS. A word to the wise: If you are setting up a crowdfunding campaign for a needy friend, make sure it’s in their name so you don’t end up wondering if you need to pay taxes on money you handed over to them. And consult an accountant before going down this route.

  1. You Asked for Spare Change

There are differing opinions out there over whether quarters dropped in a panhandler’s cup are considered earned income or a gift. Since panhandlers tend to live below the poverty line, they probably wouldn’t owe any income taxes, either way. A more pressing issue for many would be whether the panhandling counts as earned income, qualifying recipients for the earned income tax credit, which could lead to a cash payment from the IRS even if the panhandler pays no taxes.

  1. You Received Punitive Damages

Court settlements vary in their tax treatment. If you get a settlement in court to compensate you for a physical injury or emotional distress stemming from an injury, the money isn’t taxable. But if you get paid for emotional distress not tied to an injury, or you receive punitive damages, you have to pay.

  1. You Cashed in Your Life Insurance Policy

If you die, your beneficiaries probably won’t be taxed on your life insurance payout. But if you cash it in while you’re alive? Any profit you made on the policy — that is, the value in excess of premiums paid — is taxable.

  1. Your Champion Pug Had a Litter

Whether you breed your dog as a business or a hobby, money made selling puppies is taxable income. However, it’s also not cheap to breed and raise puppies, so once you deduct stud fees and all those vet bills, you may not actually show a taxable profit for your prize pups.

  1. You Put on the Red Light

Just like dealing drugs, if you sell your body in a jurisdiction where that’s illegal, you still have to report the income on Schedule C. In fact, smart high-earning prostitutes declare their income to put themselves into the position to buy a house or get credit.

  1. You Couldn’t Get Out of Jury Duty

If you got $15 for sitting on a jury, that’s taxable income, even if you turn it over to your employer. However, if you did turn it over to your employer, you also put in a deduction for the same amount on your tax form so your gross income will remain the same.

  1. You Got a Tax Refund

Last year’s state and federal refunds are taxable in some situations.

  1. You Exercised Stock Options

This is one that has gotten a lot of tech workers into financial hot water. If your company gives you stock options, that’s not a taxable event. But when you exercise the option by purchasing stock in your employer at a discount, that is a taxable event even if you don’t sell the stock right away. This can go bad if the stock declines in value after you exercise the option, because now you may owe the IRS more money than you can raise by selling the stock.

  1. Your Landlord Is Paying You to Get Out

In rent-controlled areas with high demand, such as San Francisco, it’s common for landlords to buy tenants out. This is often referred to as a relocation assistance. This is taxable, but whether to treat it as regular income or a capital gain is dicey, so you may need professional help with that one.

  1. You Are an Undocumented Worker

Despite a common belief that undocumented immigrants don’t contribute to society with tax dollars, anyone working in the U.S. is legally required to pay taxes, papers or not. And they do pay. Studies show about half of people working illegally are paying income tax, resulting in about $12 billion per year in state and local revenue.

Leave a Reply