6 Types of Income You Might Be Surprised Are Taxed
Written by
Martin Dasko
Edited by
Amber Barkley
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A recent survey from Bitcoin Postage found that a quarter of Americans have unexpectedly owed $3,000 or more in taxes because they didn’t realize they had to pay taxes on a specific income stream. Filing taxes can be stressful enough, so you’ll want to understand what types of income are subject to taxation.
Here’s a look at the types of income that may surprise you at tax time and some advice on paying unexpected taxes.
Income You Might Be Surprised Is Taxed
Your taxes are likely already deducted when you have an employer and a steady paycheck. When you file your taxes, you may even receive a refund based on your situation.
However, you may be surprised when you find out that you earned money that still requires proper taxation.
The survey found that these six types of taxable income were most commonly surprising to respondents:
- Unemployment benefits: 48.91%
- Short-term capital gains: 38.92%
- Profits from selling cryptocurrency: 37.83%
- Long-term capital gains: 37.61%
- Early withdrawal from retirement accounts: 31.83%
- Side hustle income: 17.82%
Wendy Christiansen, a CPA and tax supervisor at Taxes for Expats, stressed that since taxes aren’t automatically withheld from unemployment compensation or the other listed income streams, you’ll want to be proactive so you’re not caught off guard.
The survey found that 55% of Americans use tax software, and only 28% rely on a tax professional. In another surprising finding, 31% of Americans relied on family and friends to learn about tax rules, and 55% admitted to either never or rarely looking into tax laws — and that can land you in debt to the IRS.
For example, even though your cryptocurrency profits are digital and the coin you sold may be unregulated by a governing body, you’re still responsible for reporting the profits.
Christiansen pointed out that you shouldn’t panic if you’re caught off guard by taxes you didn’t plan on paying, because you have several options.
How To Handle Unexpected Taxes
How can you handle unexpected taxes when it comes time to file?
Consider Professional Help
“The biggest mistake to avoid when you owe taxes is talking to the IRS without professional representation,” said Stephen A. Weisberg, a principal attorney and founder at The W Tax Group. “The reality is that you don’t know what you don’t know. The processes and procedures are lengthy and complicated.”
With only 28% of Americans relying on tax professionals, it may make sense to consider professional help to ensure you’re on the right track. If you want the best possible outcome, you may want to outsource this aspect of your financial life.
Look Into Penalty Relief
“The IRS provides several options to help, including First-Time Abatement and reasonable cause relief, which may reduce penalties if hardship is a factor,” explained Christiansen.
You’ll want to see what options are available so that you can request either a reduction or removal of penalties for the debt you owe. If you’re not expecting to pay taxes, chances are that you may not have the funds. You don’t want to be stuck with additional penalties to make your financial situation worse.
Request a Payment Plan
Christiansen stated that you can also request a payment plan to spread out what you owe if you don’t have the funds for these taxes. For example, say you earned some money from selling your ethereum or your dog walking side hustle. You earned the income many months ago and have already spent it, without considering that you’ll need to file taxes.
Since you weren’t planning on paying taxes, you don’t have the money to cover your taxes. In this case, you can request a payment plan to help ease the financial pressure.
Here are a few of the payment plan options:
- Short-term payment plans (up to 180 days). If you can’t pay off your full tax bill, you could qualify for additional time of up to 180 days, and there are no extra fees.
- Installment agreement for long-term payment plans. If you can’t pay off your entire tax bill within 180 days, you can make monthly payments until your balance is paid off.
- Partial payment plan (installment agreement). This is a monthly payment plan in which you never pay off the entire amount of the debt owed. The IRS notes that this is an option for those who can’t pay off the balance within ten years.
Since this is a complicated subject, you should review the official IRS page on payment plans and consider working with a qualified tax professional. You may be subject to penalties and fees.
Currently Not Collectible Status
“If you have a severe financial hardship and you would not be able to pay your household bills if you had to pay the IRS, you may qualify for a currently not collectible status,” Weisberg said. “You’re protected from IRS collections and not required to pay the IRS anything. It may be temporary, though.”
The IRS website states, “Being currently not collectible does not mean the debt goes away, it means the IRS has determined you cannot afford to pay the debt at this time” — meaning that once you are deemed able to pay, you will still owe the tax debt.
Again, it’s a good idea to work with a qualified tax professional to ensure you receive the proper guidance about handling this complex topic. If you were surprised by one of your income streams being taxable, you should be proactive about your subsequent tax filing to avoid unexpected fees.
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