As we prepare for the 2023 Income Tax Filing Season, it’s important that you be made aware of a few pitfalls. Hopefully, if you know about these potential problems, you can either avoid them altogether or we can plan for their eventuality.
Given the fact that the 2023 tax changes haven’t even begun yet, there will be changes to this list. Also, please understand that this is by no means comprehensive. I just picked out a few that seem to be the most relevant.
Legal Awards
In most cases the award you receive after a legal proceeding is fully taxable. The problem is that sometimes, the expenses involved in achieving the settlement can not be deducted.
If the settlement arose out of a business, then we’ll have no difficulties deducting the applicable expenses. But the 2017 Tax Cuts and Jobs Act eliminated the ability for individuals to deduct legal expenses off of their Schedule A.
This means that if you have legal expenses involved in the settlement at the personal level, they are non-deductible. As such, you would be forced to pay income tax on the entire amount even though you had to pay the lawyers.
Answer #1a: This is neither reasonable nor fair. Anyone who does what I do, and actually knows what they’re talking about will never tell you that the income tax codes of these United States of America are either reasonable or fair.
Unemployment Benefits
Gone are the days during the pandemic when a portion of these were non-taxable; regular income tax applies.
Social Security Benefits
These benefits are fully income taxable at standard rates.
We can talk about the fact that you’ve already paid taxes on the money before it went into the fund. We can also talk about the fact that if you earn too much money, during certain claimant years you’ll have to pay not only the income tax but you’ll also be forced to repay a portion of the social security benefits.
This is all true. Also this is more of a reason to keep your salaries low, and your distributions high with you saving the difference for your retirement. Please refer back to Answer #1a.
Winnings and Prizes
These are fully income taxable at regular income tax rates. Whether you won big at the tables in Vegas and they issued a W-2G or you won a lousy sawbuck in the church raffle at Our Lady of The Blessed Whatever, income tax is applicable. Please refer back to Answer #1a.
Forgiveness or Cancelled Debt
Whether you negotiated a settlement with a creditor or you filed a bankruptcy, this is considered a taxable enrichment. As such, regular income tax rates apply.
It should be noted that the Supreme Court made a decision that if you’re considered insolvent, taxes are not payable. But it should also be noted that the insolvency test must be completed after the debt is forgiven, rather than before.
So you’re not only broke, but you also have to pay income tax. Please refer back to Answer #1a.
Barter
Trade for goods or services is considered exactly the same as paying for them with dollars. As such, this is a fully taxable event.
Also you are required to pay your income taxes with real money rather than barter. Please refer back to Answer #1a.
Found Money or Property
There’s an IRS Code Section that reads something like this. If you’re walking down the street and you find a $20 bill that you put into your pocket, then both income and payroll taxes are payable on that money.
How they ever decided that this was a payroll taxable event is beyond imagination. Somehow they think that you worked for that money. Please refer back to Answer #1a.
Let me leave you with this.
It should be understood that tax law is written in double negatives. They say that everything is income unless they specifically say that it isn’t and nothing is deductible unless they specifically say that it is.
Welcome to my world.
Forgetting the days of the pandemic when our world was turned on its ear and all of the ridiculous laws that made things non-taxable during that time, there are only two instances in tax law when a financial gain is not an income taxable event.
First is the proceeds of a life insurance contact. Payments going into a life insurance contract are mostly non-deductible, as such the proceeds are usually non-taxable.
Second is the sale of a primary residence. As long as you have used the home as a primary residence for two of the last five years, and the capital gain falls within the exclusion of $250K on a single and $500K on an MFJ, then tax is not assessed.
My Brothers and Sisters, every and any other taxable enrichment in this life is taxed. Please refer back to Answer #1a.
If any of these situations are happening in your life, then please contact our offices. We’ll need to do some tax planning.
We’re all going to get through this. Let’s get through it together.
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