Taxes are complicated and full of surprises, especially if you are a novice at filling out a tax form. Just when you thought it was safe to go back in the water, in swims the jaws of the IRS.
1.The economy is bad and people are looking to credit card companies to lower their rates or make settlements on the total you owe. Many people have managed to have a part of the debt owed to their credit card companies forgiven. Just when you thought you have the financial relief you needed, think again - Uncle Sam wants part of that credit card relief.
If you have money forgiven on your credit card balance, where the institution has cut down the total amount that you owe, you now owe taxes. If your total bill was $20,000 and the credit card company is willing to settle for $14,000, you owe taxes on the $6,000 that has been taken off your bill. The IRS considers this income, so you owe taxes on the amount of the money erased from your debt. Maddening yes, but there is nothing you can do about it.
Uncle Sam does have a few exceptions when it comes to mortgage forgiven loans. The 2007 Mortgage Debt Relief Act lists certain criteria and if your mortgage loan fits that criteria, you may not have to pay taxes on the money reduced off your mortgage. Restrictions reply, such as the home cannot be a vacation home, it has to be your primary residence. A cap of one million dollars for a single person and two million for a married person, really would not come into play for the average American taxpayer, but for people in the higher tax bracket it is a limit they need to adhere to.
2. Almost ten percent of the country was unemployed in the last year, this means millions of people were collecting unemployment benefits. The meager weekly allowance benefit most likely was not enough to keep you and your family in food, never mind pay the rent and utilities, but yes, this is another taxable income according to Uncle Sam. This is really a sad piece of news for people who are already struggling, but you have to pay taxes on your unemployment benefits.
3. The same goes for alimony you receive after ending a marriage. Alimony needs to be shared with the IRS, they want a piece of this too! When your ex-spouse is paying you alimony, it is considered income and you need to pay taxes on this. Alimony, separate maintenance payments or any money that your former spouse gives you in the form of similar recompense, is taxable. Child support is not taxable. In a divorce where the spouse is getting both alimony and child support, it is only the alimony portion of the compensation that is taxable. Now, flip the coin and if you are paying alimony, those payments are deductible.