Taxes are part of life, so you’re probably used to paying them, regardless of how painful it can be. A 2023 Gallup poll found that 60% of Americans think their income taxes are too high.
Some unpleasant surprises, however, could be coming your way and you may owe more than you expect.
Here are seven situations you may not have realized were taxable events.
1. Legal Awards
After going through a lawsuit, you were finally awarded a settlement or a judgment. Wait before you make plans to spend all of it, though. In many cases the award will be considered taxable.
“It depends if it is replacing taxable income,” says Steven Terrigino, certified public accountant and partner at The Bonadio Group. “For example, if it was for something like slander, punitive damages or insurance reimbursement, you will have to pay taxes on it.”
There are some exceptions when you can usually keep the entire amount, such as when the case involved observable bodily harm or you suffered an illness.
“For example, if it was for a car accident, someone destroyed your property, medical malpractice or being part of a class action lawsuit, the award would not usually be taxable,” Terrigino says.
2. Unemployment Benefits
“Surprising to most people that get laid off or lose their jobs, is that they have to pay taxes on unemployment earnings,” says Romeo Razi, a CPA and founder and operator of Taxed Right, a website that publishes free tax information. “In fact, this is one of the places that most people get burned when they file their tax returns, since they weren’t expecting the extra tax bill.”
[READ: How Are Unemployment Benefits Taxed?]
If you’re filing for unemployment benefits, check the box indicating that you agree to have at least some taxes withheld. Chances are you’ll want to have as much money as you can to cover your bills while you’re out of work, but make it a point stretch yourself.
“The safest thing you can do is make sure to withhold some tax,” Razi says. “The rate they normally ask you to withhold is either 5% or 10%.” Come tax time, you won’t regret it. And if it turns out you overpaid, you may get some money back as a refund.
3. Social Security Retirement Benefits
The great thing about retirement is that income taxes will be a thing of the past, right? Not necessarily.
“Most retirees believe that there are no taxes on Social Security,” Razi says.
“That’s only true if you don’t make money anywhere else. But if you make money outside of Social Security you may still have to pay Uncle Sam. Remember, the IRS doesn’t let you off that easy, retired or not. If you make over $34,000, or $44,000 if you’re married, you may have to pay tax on up to 85% of your Social Security,” he adds.
According to Razi, the IRS calculates the tax on your Social Security using your combined income, which is 50% of your Social Security payments plus your adjusted gross income plus your tax-free income (such as tax-exempt interest).
Depending on how high your combined income is, you’ll have to pay tax on some of your Social Security income.
4. Winnings and Prizes
You gambled and won – how exciting. In many cases, you won’t get to keep all the money, so anticipate a tax bite. In general, if you won more than $600 you’ll need to file IRS Form W-2 G to report your winnings.
“Whether you won the lottery, played fantasy football or crushed it at the casino, it’s considered income,” Terrigino says.
If you went to Las Vegas and won big at the blackjack table, a casino employee will usually give you the tax form before you get your payout, but if that doesn’t happen you’ll get it in the mail. According to the IRS, federal taxes will be withheld at a flat rate of 24%.
This also goes for game show prizes and fundraising winnings, Terrigino says.
“I had a client who participated in a ‘hole in one’ game and the prize was a car, and he had to pay taxes on it. Same with a raffle. If you bought a ticket for $5 and won $5,000, that’s reportable income,” he says.
5. Forgiven or Canceled Debt
There may have been a time where you accumulated a large amount of debt but had no way to pay it off, so you walked away from the bill. Eventually you either negotiated a settlement with the creditor, paying less than you actually owed or the company stopped contacting you and wrote off the balance. Now you can breathe.
[READ: What to Do When You’re Deep in Debt.]
Until you get a tax Form 1099-C in the mail, that is. The “C” stands for cancellation of debt, and it means that you didn’t abandon as much as you thought. The IRS says a forgiven debt of $600 or more must be reported as income.
“I see people get the most angry and frustrated when I have to explain to them that they have to pay taxes on canceled debt,” Razi says.
But the government’s position is if you don’t have to pay it back, it wasn’t a loan.
“If it wasn’t a loan, it was free money. Free money isn’t free, so now you have to pay taxes on it. It doesn’t matter if it’s a home mortgage, a credit card or a car loan. If the debt gets canceled, the Internal Revenue Service is expecting their share,” he adds.
6. Bartering
Think you can escape paying income taxes by being paid in goods and services rather than in cash? It’s possible, but the IRS expects you to include it in your gross income. You should report any bartering in the fair market value of goods or services.
“For example, if I traded tax services for plumbing services with one of my clients, I would have to figure out the fair value of the services I received from the plumber and report it as income on my taxes,” Razi says.” The plumber would have to do the same with the tax services I provided.”
You report the fair market value on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
“If there’s one thing that the IRS hates seeing more than anything else it’s bartering transactions, because it’s so hard for them to trace,” Razi, who used to work for the IRS, says.
[READ: Is Summer Camp Tax Deductible?]
7. Found Property
One of the most shocking taxable events can occur when you get extremely lucky. Say you find a backpack and pick it up to find no identification, but it’s stuffed with hundred dollar bills. This type of a windfall is also considered income, Razi says.
And this category of income includes currency as well as valuable property like watches, jewelry and collectibles you may find. If you find cash or a treasure and keep it, you should report it in the year you discovered it.
If You Think It May Be Taxable, Check
It would be great to hang on to everything that you earn or receive, but in many cases you can’t.
“The IRS has a very broad definition for what is considered gross income and a very, very narrow definition for what are considered deductions,” Razi says. “You have to be careful.”
If you are at all unclear on what is and isn’t taxable, contact a tax professional and ask. Underreporting can result in penalties and interest that can drive your tax obligation up dramatically, which is the last thing you want.
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I Have to Pay Taxes on That? originally appeared on usnews.com
