Have you ever wondered about the taxability of funds or services you receive? There are many areas in the tax code that cause confusion regarding what’s taxable.
These are some of the most common.
Alimony is taxable to the person who receives it and deductible to the person who pays it. Special rules apply.
Make sure you have proper documentation as part of a divorce decree to ensure you can support your tax position.
Child support isn’t taxable to the person who receives it on behalf of their dependent. Also, it isn’t deductible for the person who pays it.
A free service is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return.
If you exchange services, you can deduct allowable business expenses against the value of services received.
Jury duty pay
This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.
A general rule of thumb with legal settlements is to consider what the settlement replaces.
If the settlement revenue replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.
Life insurance proceeds
Generally, life insurance proceeds paid to you because of the death of an insured aren’t taxable. However, there are a number of exceptions to this general rule.
For example, if you receive benefits in installments above the value of the life insurance policy at the time of death, or if you receive a cash payout of a policy, you could have taxable income.
You should report most prizes you win as ordinary income using the fair market value of the item.
This area has been a major surprise to contestants on game shows or people who receiv large gifts at celebrations.
Typically, you should report unemployment compensation as taxable income.
Many are confused by this because of a temporary federal tax law that made unemployment compensation nontaxable during the recent economic recession. This is no longer the case.
Have questions about the tax status of funds or services you receive? Let’s talk!