You probably know you pay taxes on your income from your regular job and any side hustles you have, investment income, and any property you own. You get tax documents for these every year to help remind you. But if you thought that was all you owed taxes on, you would be mistaken.
The government considers almost all types of income fair game for taxing, including the five sources listed below. These may not all apply to you, but if they do, don't forget to include them on your tax return this year.
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1. Social Security benefits
You pay Social Security taxes out of your paychecks, but you could also owe taxes on your Social Security benefits if your combined income exceeds certain thresholds. Combined income is defined as your adjusted gross income (AGI) -- your income minus tax deductions -- plus any nontaxable interest and half of your Social Security benefits.
Individuals with a combined income exceeding $25,000 and married couples with a combined income exceeding $32,000 could owe taxes on up to 50% of their Social Security benefits. Individuals with a combined income exceeding $34,000 and married couples with a combined income exceeding $44,000 could owe taxes on up to 85% of their benefits. The Social Security benefit tax formula is a little beyond the scope of this article, but here's a more detailed guide if you'd like to figure out how much you might have to give back to the government in taxes in this regard.
2. Alimony payments
If you were divorced in 2018 or earlier and you receive alimony payments from your ex-spouse, you could owe taxes on these, as well. The government considers this to be another source of income, just as if you were receiving money from a job, so you must indicate how much you received in alimony throughout the year on your tax return.
Those who were divorced in 2019 or later don't have to worry about paying taxes on alimony they receive because the IRS has since changed the law. You also don't have to worry about paying taxes on child support you received, regardless of when you got divorced, because the government doesn't touch this.
3. Debt cancellation
Some lenders are willing to negotiate a settlement with you if you're unable to pay back the full amount you owe. You tell them what you're able to pay, and if the lender agrees, they'll absolve you of the remaining debt. But the IRS won't let you off that easily.
The unpaid amount that the lender forgave is considered taxable income. Your lender will send you a 1099 and you must report this when you file your taxes. If for some reason you don't get a 1099, contact your lender and wait to file your taxes until you have all of the necessary paperwork.
4. Large financial gifts
You probably don't have to worry about owing taxes on money you gave to friends or relatives for birthdays or holidays unless you were extremely generous. The IRS lets single adults give away up to $15,000 per person per year, and married couples can give double that without anyone owing gift taxes. Gifts made to your spouse, gifts to political organizations, and gifts to cover someone's tuition or medical expenses are exempt from the gift tax.
If you cross over these thresholds, you could owe gift tax, but you probably still won't. The IRS enables each person to gift up to $11.4 million in their lifetimes above and beyond the annual exclusion amount before they actually owe gift taxes. But if you gave more than $15,000 to someone this year or more than $30,000 if you're married, you will have to file Form 709 to help the government keep track of your taxable gifts.
For example, if you're a single adult and you gave a relative $20,000 this year, the first $15,000 wouldn't count against you because you're allowed to give up to $15,000 per person per year without incurring gift taxes. You'd still have to submit a Form 709 and the extra $5,000 you gave would count toward your $11.4 million lifetime limit, but unless you exceeded that sum, you wouldn't owe gift taxes.
5. Scholarships
Scholarships aren't always taxable. It depends on what you use them for. Money that goes directly toward tuition, books, or other supplies that are essential for your schooling is tax-free. But scholarship money that you put toward the cost of your room and board is not, since this is not directly related to your education. You must report this money on your tax return to avoid running into problems with the IRS.
There are legal exceptions, mentioned above, that can help you avoid taxes on some of these expenses, but don't think you're going to sneak one by the government by failing to report this income. That could get you audited, and then you'll have to pay everything you owe and possibly a penalty too. Report these five sources of income if you have them, so you don't have any problems.
