Although the tax filing date of Apr. 18 might seem like a long way off, it’s already time to start taking a look at your year-end tax situation. Actions you take now could help reduce your taxable income and/or help you reduce your tax liability for 2023, so it pays to get your affairs in order.
One thing that you want to avoid is getting tripped up by surprise sources of income. While you’re likely well aware that your wages, salary and self-employment earnings are fully taxable, there are plenty of sources of revenue that you may think are tax-free that could actually come back to bite you.
Cryptocurrency is the Wild West of the investment world. From its volatility to its decentralized nature, it can almost seem like a game to some investors.
In the eyes of the IRS, though, crypto is a financial asset in the same category as stocks and bonds. If you sell your crypto at a gain, you’ll owe taxes on your profits. If you’re an active trader, those gains will be short-term, meaning you’ll owe ordinary income tax on them.
Only if your crypto is held for longer than one year will you be able to take advantage of lower capital gains tax rates.
Lottery or Gambling Winnings
Gambling or lottery winnings is another area that taxpayers often overlook when filing their returns. If you win $100 at a blackjack table, for instance, you’re likely to forget it by the time you file your taxes. But any gambling winnings that exceed your losses are legally taxable.
If you win more than $600 at one time, the payer is generally required to file Form W2-G and report those winnings to the IRS. If you win more than $5,000, the payer may be required to immediately withhold 28% of those winnings, or 31% if you don’t provide your Social Security number. Whether or not all those forms are actually filed can vary, but in the eyes of the IRS, all of your winnings are taxable income.
Social Security generally isn’t taxable, but that’s what makes it “sneaky.” Many Americans assume that Social Security is never taxable, since it may be seen as a return on the taxes that workers pay over their careers. However, if you earn above certain limits, up to 85% of your income may indeed be taxable.
For 2023, the income threshold is $25,000 for single taxpayers and $32,000 for joint filers. For purposes of this calculation, the income threshold includes your adjusted gross income plus your tax-exempt income less one-half of your Social Security earnings.
Long-Term Disability Payments
In many cases, long-term disability payments are nontaxable. However, if your employer paid for your disability insurance, your benefits are fully taxable. If you split payments between yourself and your employer, the benefits you receive that are due to your employer’s payments only are taxable.
In other words, if you pay 30% of your disability insurance premiums and your employer pays 70%, then generally 70% of your benefits will be taxable.
Alimony is generally not taxable to the recipient. However, this is a fairly recent change. If your divorce agreement was signed before Jan. 1, 2019, the payer of the alimony generally gets a tax deduction and the payments are considered taxable income to the recipient.
If your divorce decree was enacted before this date, unless changes are made to it, you’ll likely have to declare your alimony payments as taxable income.
Awards, Prizes or Sign-Up Bonuses
If you win a cash prize in a contest, are awarded a stipend by your local community or earn a sign-up bonus for opening a new checking account, those payments are all considered taxable income. They are also particularly easy to be overlooked at tax time.
Although small contest winnings or local awards aren’t always reported to the IRS, they are still taxable income. New account rewards issued by banks, however, are nearly always reported to the IRS as interest income, so you should expect a tax form in the mail — and the IRS will get its own copy as well.
In what might seem like a cruel twist of fate to some, canceled or forgiven debts are considered taxable income by the IRS. If you have a $10,000 debt and you settle it for $4,000, for example, the $6,000 that was wiped off the books is now considered taxable income.
Although you won’t have to pay the full amount back to your creditor, you may have to pay 10%, 20% or even more to the IRS in the form of income tax. One of the biggest exceptions to this rule is if you wipe your debts clean by filing bankruptcy. In that case, your debts are typically erased, with no additional tax obligation.
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