FORT BENNING, Ga (March 19, 2014) -- With a few weeks of preparing and electronically filing taxes under their belts, the preparers at the Army Fort Benning Tax Center are starting to see some trends in tax laws which continue to catch taxpayers off-guard.
Here are some rules that have been surprising the Tax Center clients. Hopefully, this article will help eliminate the surprise and allow you to plan accordingly.
No. 1. Unemployment benefits
If you received unemployment last year, or any other state-related payments, this will be reported by the state to you and the IRS on a 1099-G. Many people are surprised to learn that these unemployment benefits are considered wage income, and the IRS does want to tax you on it.
To help reduce the effect of this surprise, it is best when you apply for unemployment benefits to consider having federal income taxes withheld. This process is similar to regular payroll withholding. In this case, the form you fill out is the federal W-4V, Voluntary Withholding Request, or a similar IRS-acceptable document that the paying agency has created. This way, taxes will be withheld at the rate of 10 percent of each unemployment payment.
No. 2. Alimony received
The IRS has long held alimony is income to the person who receives it, and it is a deduction for the person who pays. This is different than the rule for child support. Child support is neither income nor deductible.
Alimony, separate maintenance payments and similar recompense from your former spouse are taxable to you in the year you receive them. If your divorce decree calls for alimony and child support and specifies amounts for each, you only owe the IRS for the alimony payments. In order to adjust for this surprise, you can either make estimated tax payments or withhold more money from your work paychecks.
No. 3. Forgiven or canceled debt
Most taxpayers are surprised to learn that the deal they worked out with the credit card company where they reduced their bill from $8,000 to $4,000 is a taxable transaction. The financial institution will report canceled debt like the one mentioned on a Form 1099-C.
Because you are receiving a benefit you would otherwise be obligated to pay, the IRS considers this income to you. Not every debt forgiven is taxable, however. Under the Mortgage Debt Relief Act of 2007, some homeowners who are granted forgiveness of mortgage debt won't have to pay taxes on that amount.
There are some restrictions. The forgiven debt amount is limited to up to $2 million, or $1 million for a married person filing a separate tax return. The tax relief only applies to mortgage debt discharged by a lender between 2007 and 2013. And the forgiven loan must have been taken out to buy or build a primary residence, not a second or vacation home.
No. 4. Prize winnings
Money earned from gambling, lottery and prizes, such as won on a game show, are included in the long list of "other income" seen on line 21 of your 1040. The IRS considers this as unearned income and requires you to report it. For gambling winnings, if it reaches a certain amount, you will most likely receive a W-2G.
There is, however, a chance to deduct the amount of your gambling losses against your winnings. This can only be done on your Schedule A; you should not attempt to offset it directly on the 1040.
Additionally, be careful when reporting the amount of a noncash prize. In most cases, companies and groups that award prizes will send you a Form 1099 declaring the value of what you won. If your tax return reports substantially less than what the giver claims, your underreporting could raise a red flag to the IRS.
No. 5. Some Social Security benefits
Generally, if Social Security benefits are your only income, your benefits are not taxable. However, if you collect Social Security and have another job making decent income, as much as 85 percent could be subject to tax. To figure out how much in taxes your Social Security might cost you, you'll have to do some calculating using the work sheet found in your tax Form 1040 or 1040a.If you believe you might be subject to taxes on your Social Security benefits, you can file the Form W-4V Voluntary Withholding Request and file it with the local Social Security Administration Office.
The Fort Benning Tax Center will file federal and state returns for the 2014 season until the April 15 deadline. All returns are prepared and e-filed at no charge by individuals certified by the IRS. The Tax Center will be open Monday, Tuesday, Thursday and Friday from 9 a.m. to 4 p.m., Wednesday noon to 7 p.m., and every other Saturday beginning Feb. 8 from 9 a.m. to 1 p.m.
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