The IRS always seems to have a surprise for the unsuspecting taxpayer. As the 2023 tax season comes to an end, here’s a True or False quiz to test your knowledge of what’s taxable.
Scholarships are never taxable.
False. If you get scholarship money to cover tuition, fees, and books, you pay no taxes. But if your scholarship also covers room and board, travel, and other expenses, that portion of the award is taxable. Students who get financial aid in exchange for work must also pay tax on that money even if they use it to pay tuition.
Minor gambling winnings are not taxable.
False. When lady luck smiles on you, the tax collector typically doesn’t. While virtually all gambling winnings are deemed taxable income, not all winnings are reported to the IRS. The IRS requires reporting of winnings at various thresholds depending on the game: $1,200 or more from bingo or slot machines, or more than $5,000, minus the wager, from a poker tournament. If reported, the payer will issue you a Form W-2G and report what you won to the IRS. The practical nature of keeping track of and claiming this minor income is a different matter entirely.
If you lose your job and start collecting unemployment benefits, the IRS will cut you a tax break.
False. The IRS considers unemployment income to be a replacement for your regular income and is therefore taxable. (During the pandemic, the IRS had legislated to make this unemployment tax-free, but this was only for a limited time.) The good news is that not all states do the same.
If someone forgives an amount of money that you owe them, you typically have to pay taxes on that amount.
True. Debt cancelled or otherwise discharged for less than what you owe – credit cards, mortgages, loans and so on – is generally taxable income per the IRS. Exceptions can include student loans, debts discharged in bankruptcy, or amounts in specific mortgage foreclosures as defined in a special tax law. The creditor may send you a federal Form 1099-C in the amount of the cancelled debt, which means the money also gets reported to IRS.
An agreement between two small businesses to get free haircuts in exchange for mowing a lawn is not taxable.
False. When you exchange services in lieu of cash in a formal arrangement, the fair market value of the goods and services are fully taxable. You should get an IRS Form 1099-B or the like showing the value of cash, property, services, credits, or other items that you received from the barter. On the positive side, any expenses you incurred to hold up your end of a deal are typically deductible as a business expense.
Should you have any questions or concerns regarding your tax situation please feel free to call us (610) 296-2500.
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