Is It Taxable? These 10 Income Sources Might Surprise You
Think your side hustle, cash gifts, or game show winnings are tax-free?
Think again! The IRS taxes some surprising sources of income—and missing these could mean an unexpected tax bill. Here’s what you need to know to avoid a tax-time surprise.
Unemployment Compensation
Unemployment compensation is generally taxable income and must be reported on your tax return. If you received unemployment benefits this year, be prepared for a potential tax bill.
Tip: In some cases, federal and state governments authorize exemptions for unemployment income. Stay updated on legislative changes that might impact your tax liability.
Free Services & Bartering
If you receive free services through bartering, the fair market value of those services is taxable income. Under IRS barter regulations, both parties in a service exchange must report the value of services received as income.
Tip: If you exchange services, you may be able to deduct business expenses related to what you provided. Keep records of all barter transactions to ensure proper tax reporting.
Illegal Activities (Yes, Really!)
Even income from illegal activities is taxable. The IRS states that even stolen property should be reported at fair market value on the date it was taken.
While we don’t encourage illegal activities, it’s interesting to note that tax evasion has taken down more criminals than their actual crimes!
Jury Duty Pay
Serving on a jury? Jury duty pay is taxable as ordinary income.
Tip: If your employer requires you to turn over your jury duty earnings, you may be able to deduct that amount when you file your taxes.
Legal Settlements: When Are They Taxable?
The taxability of legal settlements depends on what the settlement compensates for:
- Taxable: Settlements for lost wages, punitive damages, or interest.
- Not Taxable: Payments for personal injury or illness (if no punitive damages are included).
- Gray Areas: Emotional distress settlements without a physical injury may be taxable.
Tip: Legal settlements can be complex—consult a tax professional to determine how yours should be reported.
Life Insurance Proceeds
Generally, life insurance payouts to beneficiaries are not taxable. However, exceptions apply:
- Taxable: If benefits are received in installments above the original policy value or if you cash out a policy before death.
- Not Taxable: Lump-sum payments upon the policyholder’s death.
Tip: If you have a life insurance policy, check with your provider about potential tax implications for beneficiaries.
Prizes & Contest Winnings
Game show prizes, cash winnings, and even luxury gifts received at award ceremonies are taxable as ordinary income.
Tip: If you win a prize, set aside a portion for taxes! Many prize recipients are caught off guard by the IRS bill that follows their big win.
Alimony: Taxable or Not?
The tax treatment of alimony depends on when the divorce was finalized:
- Before 2019: Alimony is taxable for the recipient and deductible for the payer.
- 2019 or Later: Alimony is not taxable for the recipient and not deductible for the payer.
Tip: If modifying an old divorce decree, proper documentation is essential to maintain the original tax treatment.
Child Support
Unlike alimony, child support is not taxable to the recipient and not deductible by the payer.
Tip: This rule remains consistent under current tax law, so no need to report child support payments as income.
S-Corp Health Insurance
For S-corporation owners with more than 2% ownership, health insurance premiums paid by the business are considered taxable wages—but they are not subject to FICA taxes.
Tip: If you’re an S-Corp owner, be sure to report health insurance premiums correctly on your W-2.
Final Thoughts
Taxes can be tricky, especially when dealing with unexpected taxable income. If you’re unsure how to report income correctly or want to minimize your tax burden, consulting a tax professional can save you money and headaches.
Need help navigating tax rules? Contact our office—we’re here to help!
