Many things in life predictably come with a tax bill. But life isn’t always predictable. Here are four things that tax professionals say frequently create surprise tax bills — and how you can cope.
1. Debt forgiveness
“The cancellation of debt is includable in your gross income,” says Paul La Monaca, a certified public accountant and the director of education for the National Society of Tax Professionals. There are exceptions, such as for insolvency or bankruptcy, but usually you’re stuck, he notes.
How to cope: Plan ahead to set something aside for the extra taxes — you (and the IRS) probably will get a Form 1099-C from the lender, showing how much of that forgiven or discharged debt is now taxable income. Nail down the date of the forgiveness or discharge, too, La Monaca says. That could determine in which tax year you’ll take the hit.
2. Selling your house
If you sell your primary home for more than you paid for it, typically you can exclude up to $250,000 of that capital gain from your income if you’re single, and up to $500,000 of that gain if you’re married and filing jointly. That shields many people, but folks selling a home they’ve owned for a long time or people in a hot real estate market could get stung, La Monaca warns.
3. Gambling winnings
When you get lucky, so does the IRS. Gambling winnings are fully taxable — and that includes payouts from lotteries, raffles, horse races, casinos and other bets. Prizes are included, too (think cars or cruises), not just cash.
How to cope: Tally your gambling losses — they can be deductible if you also report your winnings. That could make less of your hot streak taxable (you can’t deduct more losses than winnings, though). And beware of fantasy-sports sites, cautions Stephen Mankowski, a CPA and partner at EP Caine & Associates in Bryn Mawr, Pennsylvania. Those winnings may count as income, too.
4. Inadequate withholding
Income taxes are generally a pay-as-you-go proposition, which is why employers typically withhold income tax from your paycheck throughout the year. If you got a big surprise tax bill last April, your employer may not be withholding enough.
How to cope: Fill out a new W-4. That’s the IRS form you give your employer, instructing it on how much tax to withhold from each paycheck. You can change your W-4 at any time. If you’re married and filing jointly, think about what your combined tax situation is, then adjust, Mankowski says.
“A simple little change can really account for a lot,” he says.
Source by usatoday…