Many people have similar tax situations from year to year, and so they become familiar with the rules and regulations that apply to their personal finances. However, changes in your situation or once-in-a-lifetime events can often have significant tax implications. Here are some of the lesser-known elements of our tax code that tend to trip people up.
1. Did you know that lawsuit settlements may be taxable?
The rules vary based on the type of suit, but in many cases, plaintiffs will even be taxed on the legal fees that come out of a settlement. If you’re involved in a lawsuit, it’s worth your while to consult a tax professional early in the process so you understand what you stand to gain when all is said and done. Don’t wait for a surprise 1099 in the mail at tax time. Learn more.
2. Scholarship proceeds may count as income to students.
When scholarship proceeds are used for anything other than qualified education expenses (including tuition, fees, books, and equipment), they count as unearned income and are subject to tax. A common pitfall is room and board—those expenses don’t count as qualified education expenses for scholarships. If your children or you have received a scholarship this year, learn more about your tax obligations.
3. Pending SECURE Act would impact IRA beneficiaries.
The SECURE Act is legislation that’s currently pending in Congress and will make significant changes to retirement savings regulations. As the bill currently stands, non-spousal beneficiaries of IRAs will be required to empty those accounts within 10 years of receiving the inheritance. Traditionally, beneficiaries have kept these accounts open in order to continue earning income. Learn more.
4. Deducting state and local taxes on your federal return has its limits.
The Tax Cuts and Jobs Act, which went into effect for 2018, put a $10,000 cap on the amount of state and local taxes that you can deduct on your federal return. If your state and local taxes (which include things like real estate, income, and sales taxes) exceed the cap, you may not owe federal tax on your state/local refund. Learn more.
5. Gambling wins and losses affect your taxes.
Regardless of whether you win or lose—be it on a lottery ticket, at the track, or on slots—your gambling is likely to show up on your taxes. Many people were surprised to learn that they couldn’t deduct gambling losses on their 2018 tax returns without itemizing their deductions. If you’re planning a Vegas trip this year or just enjoy visiting the local casino, you’ll want to learn more.
We have two pieces of advice when it comes to navigating confusing tax situations:
1. Get started early.
The more you can plan in advance, the better prepared you’ll be for what’s coming your way at tax time.
2. Consult a professional.
A qualified tax professional can help you understand the rules and regulations that apply to your specific situation. We would be honored for you to consult with us. But above all, don’t try to DIY your complex tax issues.