We all know that we must pay both income and social security taxes on employment income as well as any contract labor. But the IRS levies income taxes on some other sources of income too – some more surprising than others. If you received a windfall or other unexpected funds in 2010, chances are the IRS will view it as income. Read below for some of the most overlooked items.

Taxable Items

Generally speaking, the IRS taxes anything that leaves you in a better economic position than you were before you received it. Sometimes, like when you sell a house, the IRS has credits or deductions to eliminate all or part of the tax. Other times, you simply have to pay up. Prepare to open your wallet for:

  • Scholarships/financial aid: Scholarships and financial aid used for tuition or other required fees, books, or supplies are not taxable (and they must be subtracted from any tuition tax deductions). However any funds that are used for living expenses, travel, or expenses that are not required are considered income by the IRS and fully taxable. Students not enrolled in a degree program may have to pay taxes on all financial aid, even when spent on otherwise qualified expenses.
  • Debt settlement: If you find yourself unable to pay credit card or other debts, the lender may negotiate with you to pay a reduced amount. Any forgiven debt is subject to taxation and will be reported to the IRS if it is more than $600. If you have a negative net worth at the time of the settlement, the IRS may waive the tax liability. Until 2012, this does not apply to debt cancellation involving a principal residence mortgage. Taxpayers also do not owe taxes on any debts discharged through bankruptcy.
  • Gambling Winnings: If you hit the jackpot in Vegas or win the lottery, you will owe the IRS a nice chunk of change. This is one of the main reasons people might choose to take annual payments, when they’re an option, rather than a lump-sum payout.
  • Prizes: Along with lottery and other gambling winnings, you will have to pay taxes on any prizes you received, regardless of whether they were given in the form of cash. If your church or child’s school sold raffle tickets, and you win a car, you’ll have to pay taxes on the cash value of that car. Ditto for any game show or contest winnings.

Exceptions to the Rule

  • Gifts: If you received a gift from a friend, relative or perfect stranger, you do not have to pay taxes on it – but they might. However, be aware that any money exchanged between an employer and employee is considered compensation and therefore taxable income.
  • Fringe Benefits: To encourage employers to provide more benefits across the board, the IRS allows them to take a tax deduction for the value of many of those benefits, and also allows you to receive the benefits tax free. Tax-free benefits include things like your health insurance, childcare assistance, and access to gym facilities on the employers’ premises. But other benefits may be taxable, especially if they’re only offered to certain employees – your employer should notify you if you are affected.

In addition, Credit Card Rewards are generally not taxable.

If you’re looking for something specific that you don’t see on the list, feel free to ask about it in the comments. But as a general rule of thumb, the answer to your question is simple: if you had measurable economic gain, it’s probably taxable. Exceptions do exist, so check with your accountant or tax preparer if you’re really not sure!



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Comments to Surprising Things That Count as Taxable Income

  1. Jill, a co-worker`s husband received money from his deceased Dad`s bank account. it was $14,000. Is that a gift or inheritance? He has to split it with his brother,but the amount was issued to him via check.

    Brenda

    • If it was issued in his name only, the whole thing should be classified as an inheritance. Not taxable to him, may be taxable to the dad’s estate if it was large (but if he only left his son $14k, unlikely).

      The $7k he gives his brother would then be a gift from him to his bro, since the check was only made to him. Since under the gift tax annual exclusion, no tax for either one.

      Jill

      • Thanks Jill!!! I will pass on the information.

        Brenda


    • Should caveat that I’m answering as best as I can with the info I have. People, check with your accountant if your situation has intricate details!

      Jill

  2. my husband participated in a food test tasting at a university – they gave him a $20 Walmart gift card. is that taxable income?

    Jan Phillips

  3. If I give my parent a house or a car, do those count as their income?

    Warren

    • Quote by Warren: If I give my parent a house or a car, do those count as their income?
      Answer : NO.
      First of all Warren, income is a legal term for federal income tax purposes. 99.9999% of the people of this nation do not know anything about federal income taxes other than believing that everyone owes the tax. A careful study of the taxing laws and regulations and some US Supreme Court tax case decisions prove beyond a shadow of doubt that you or me or anyone else in the USA or the US (Government) is NOT LIABLE for the income tax. Income is NOT defined in the Internal Revenue Code and in a tax case where income was submitted for a decision by the Highest Court, the court made it very clear that Income is used as the measurement of the tax on federal corporate activity of profits and gains. Unless you or anyone else Warren, are engaged in a trade or business with the United States Government, then you can be made subject to federal income taxes but only by you as a federal employee, making a voluntary agreement with the employer (Government) to have income taxes withheld.

      ALVIS JENKINS

  4. I’ve been looking for some clarification on “gambling income”. If you win a good sum of money (let’s assume $10K to satisfy any thresholds) in an office or friends football pool, is that considered gambling income and therefore taxable?

    Jake T.

  5. Good news!!! If you win the lottery, you ARE NOT REQUIRED to pay taxes to the IRS. How do I know that? I’m a self made tax lawyer. Withholding of federal income tax occurs in employment. Is the Lottery your new employer? Are you a new employee to the lottery? If your answer is NO to those two questions, then you are not required to have taxes withheld. Section 3404 of Title 26 says that you must file a tax return through a governmental employer. The lottery of any State of the Union is not a governmental employer to lottery players. So why don’t you sue the lottery for unlawfully withholding if you win one of those multi-million dollar prizes? But be sure to sign the withholding tax form that the lottery requires with the words next to your signature, “Signed under duress”. This notation gives YOU the winner the authority to sue.

    ALVIS JENKINS

  6. How about it folks, lets all ask Mitt Romney when he takes the election of President of the USA, to end the unlawful taking of money from your income which is income outside of federal jurisdiction. And we don’t need another income tax either such as the Fair Tax, etc. Maybe everyone who reads my comment should do some serious research and just see where this income tax being withheld from private non-federal employment goes to. In 1953 a then IRS commissioner remarked to the House Ways Means Committee that the income tax is 100% voluntary but your liquor tax is 100% enforced. Of course the commissioner was referring to federal trades and businesses only. I keep what money is mine and only pay taxes that I lawfully owe. How about you?

    ALVIS JENKINS

  7. This is a weird question but my life depends on it. My mother from overseas wants to send me a large amount of money so I can buy a house here in US. I am a single mother, I make less than 20k a year and paying rent is not an option. After I buy this primary residence with my mother’s money, will I have to pay tax for them?

    Simona


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