As the 2015 tax year winds down, there may be some tax surprises in store for you if you received any income aside from W2 or self-employment wages. Here is a look at some of the more common sources of income, along with their possible tax implications on tax day.
Although options may vary from state to state, you can elect to have taxes withheld from unemployment insurance at the time you file your initial claim. In California, UI recipients have the option of withholding taxes each time they re-certify for their benefits. This gives them the flexibility to decide whether or not to have taxes withheld from each benefit pay period, generally every two weeks. You will receive a 1099-G form at the end of the year that will detail the dollar amount of UI benefits received and taxes withheld, if any.
You will need to report this income on your tax return and keep the 1099-G for your records.
Life Insurance Proceeds
According to the IRS, life insurance proceeds are taxable. This can be a hardship, especially if you used the proceeds to pay costs associated with a loved one’s death. However, if you used the proceeds to pay out-of-pocket medical expenses, you can deduct the cost of those expenses. Claiming these costs as an itemized deduction may take some of the sting out of the taxes you may owe on the insurance proceeds.
Lottery Winnings and Prizes
If you hit the lottery or won a big-ticket prize such as a TV or car, you’ll need to pay taxes. The good news: at the time you win the lottery proceeds, you can elect to have taxes deducted from the winnings before they are distributed to you. This will cover your tax liability.
However, if you win a free product or luxury item, you will be taxed on the retail value of that item, which means you’ll be paying the taxes out of pocket at the end of the year.
No one likes surprise taxes, especially when they accompany an unexpected event such as unemployment, death of a loved one, or even winning the lottery. Take the sting out of these last-minute taxes by understanding your tax liability. If the thought of tax code leaves you cold, consult a qualified tax professional for advice.
They can not only help you understand the extent of your tax liability, they can also help you determine which payment plan is best for you if you can’t pay the additional taxes in one lump sum on tax day. Life is full of surprises…a large tax bill shouldn’t be one of them.