8 surprising things that are taxable

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On the list of things you hate, somewhere in there is probably learning that something you didn't think you had to pay tax on, you do.

Any money that comes into your life can be taxable, says San Diego-based tax attorney Sam Brotman.

"Technically, under Internal Revenue Code Section 62, the IRS can find a way to tax almost every way of receiving money ... Even finding $20 on the street would be considered taxable, and the IRS would want their fair share of the money that you receive," he says.

On a practical note, Brotman says most people don't report that $20 bill, and "the reality of the situation also is that the IRS does not have enough enforcement resources to come after people who forget to declare little items on their return. It would cost them more to come after those people than they would get in tax revenue for the government."

Still, $10 you won from a lottery ticket and $1,000 in winnings is another story. If you want a heads up on what unusual monetary situations are taxable, and what you should be reporting when you file, read on.

Employee awards. Were you an especially productive employee last year? You may have some bad news coming.

"Rewarded for doing good work? Cash awards or bonuses from your employer are taxable. So are vacation trips for meeting sales goals," says Robin Solomon, a tax and benefits attorney with Ivins, Phillips & Barker in the District of Columbia.

On the plus side, Solomon adds, "An exception applies for noncash employee achievement awards – such as a gold watch or iPod shuffle – presented for your length of service or safety achievement. These are generally not taxable if valued below $400."

The same goes for other nominal (that is, cheap) holiday gifts, Solomon says. So if you were given a Christmas ham, she says you don't have to worry.

Related: The 10 strangest ways states tax you (or don't).
10 Strangest Ways That States Tax You (or Don't)
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8 surprising things that are taxable
To preserve the uniqueness of their island paradise, Hawaii since 2004 has had an "Exceptional Tree" tax allowance. Landowners can deduct up to $3,000 from their income for expenses such as pruning and fertilization for any tree designated as rare, big, old or a combination thereof. That's per tree. Top-bracket earners taxed at the state's highest rate (11 percent) would save $330 via the deduction. The work must be done by a certified arborist, and the deduction can be claimed only every third year. Hawaii has had a list of "Exceptional Trees" since 1975, and there are now estimated to be more than a thousand thus designated.
Maine legislators tax anyone who deals in their official state fruit-blueberries, at the rate of 1.5 cents per pound. The resulting revenues-more than $1.6 million to state coffers in the fiscal year that ended in June 2013-are used to promote the crop and agricultural research. 
The state also taxes harvesters and processors of hard-shell clams (known in the state as mahogany quahogs) at $1.25 a bushel, but state revenues for that are much lower. 
Alabama is the last in the union to tax a deck of cards as if it were a "vice," like alcohol and tobacco. Taxing decks of cards, associated with gambling, was once fairly common, but most states have since set up separate control boards to regulate liquor and tobacco, and have let the cards slide.
But in Alabama, you'll still pay a 10 cent sales tax on any pack of cards you purchase. Retailers also have to pay $2 to the state each year for the privilege of selling playing cards.
Virginia levies a 50-cent excise tax on every lamb or sheep sold in the state. Both the Maine and Virginia taxes are examples of checkoff programs that collect taxes from an industry to fund promotional campaigns for the products. National commodity checkoff programs, authorized by the U.S. Department of Agriculture, have brought you campaigns such as "Beef: It's What's for Dinner" and "Got Milk?" But the Virginia program is extremely modest by comparison, having collected only $9,000 in fiscal year 2013. The funds go to the Virginia Sheep Industry Board, which spends them largely on predator control.
In 2013, in part to meet federal pollution-control mandates, Maryland legislators enacted fees on property owners in Baltimore and nine other Maryland counties, aimed at curbing storm water runoff. The fees were meant to fund programs to improve the water quality of the Chesapeake Bay, the largest marine estuary in the U.S. Sounds simple enough, but the way Maryland legislators wrote the law has led to an angry backlash in some corners against this so-called “rain tax.” One way localities calculate the tax is by measuring how much of a landowner’s tract is "impervious" to precipitation seeping into the ground. So the more you've developed it with buildings, driveways, tennis courts and the like, the less it will absorb and the more you pay. That's how the tax is being implemented (through aerial and satellite photos) in Montgomery County, a heavily developed suburb of Washington, and many landowners are up in arms. New Maryland Gov. Larry Hogan, a Republican, campaigned against this tax in his winning 2014 campaign and has introduced legislation to repeal it, though it’s not clear that will fly with Democratic state legislators. Money still needs to be raised to satisfy the federal pollution mandates, but the methods may change.
Kansas is among a bevy of jurisdictions that allows sale of lower-alcohol beer (the term of art is “cereal malt beverage”) in convenience and grocery stores. But Kansas also taxes “3.2” beer differently -- and there lies the rub. At a liquor store, all products, including, say, a conventional six-pack of Budweiser (with 5 percent alcohol by volume), are taxed at a special rate of 8 percent. At the convenience store down the street, however, ordinary sales tax is levied on the lower-alcohol, cereal malt beverage bottle of Bud. That often ends up being more than the 8 percent alcohol tax. In Pomona, Kansas, for example, the effective rate on the weaker beer would be 9.7 percent. Go figure.
When it comes to taxation, the rule is generally the stronger the booze, the higher the tax (that's why Kansas's beer tax scheme is an anomaly). California follows that curve, but at 100 proof, you better be ready to pay through the nose. Distilled spirits are taxed at $3.30 a gallon if below 100 proof, or 50 percent alcohol. Go over that, like with Bacardi 151, and the tax doubles to $6.60. Maryland also notes the 100 proof point, but it only adds 1.5 cents per proof, per gallon to the relatively modest liquor tax of $1.50 per gallon, taking the Bacardi 151 to $2.27 per gallon.
Entertainment venues pay a business tax to Nevada ranging from 5 percent to 10 percent on admissions fees (and food, drink and merchandise sales) whenever there’s live entertainment going on. There are exemptions, however, including this one, for businesses that provide "instrumental or vocal music, which may or may not be supplemented with commentary by the musicians, in a restaurant, lounge or similar area if such music does not routinely rise to the volume that interferes with casual conversation and if such music would not generally cause patrons to watch as well as listen." So your piano player can play “Feelings” softly and even crack a few jokes, tax-free, for your business. Just make sure they're not funny enough to attract attention.
Want to own a plush or fuel-thirsty ride? That’ll cost you extra in New Jersey. Cars that cost $45,000 or more or have a combined EPA fuel-mileage average of 19 or below pay an additional 0.4 percent on top of New Jersey’s 7 percent sales tax. 
In New Mexico, making it to 100 years has a payoff beyond the chance that Willard Scott will wish you a happy birthday: You don’t have to pay state income tax anymore. If you’ve been physically present in the state for at least six months and a resident of the state on the last day of the year, and you’re not someone’s dependent, you’re eligible. You’ll still need to file, and there are some complications if you’re married and your spouse doesn’t qualify.

Gambling wins. When you win the Powerball, the IRS takes a nice chunk of that money. But did you know it is entitled to smaller lottery wins, too?

"Any gambling wins, including lottery and fantasy sports, are income," says Bob McKenzie, a Chicago tax attorney with Arnstein & Lehr. But there is an upside, he adds: "You can deduct your gambling losses against winnings."

Money won in a lawsuit. You sued someone or settled out of court, and it all worked out in your favor. It's not all good news, unfortunately. You may have to pay the IRS, says Michael Eckstein, a tax accountant based in Huntington, New York.

"Unbeknownst to most, legal settlements and awards can be taxable. Their taxability is usually complicated and often depends on the details of a particular case," Eckstein says. "To oversimplify things, the taxability of compensatory damages depends on what loss the award was meant to make whole, whereas punitive damages are generally taxable."

Canceled debt. If you've been financially struggling for a while and finally achieved a minor or major victory, talk about disappointing news.

"If you are in financial trouble and are able to negotiate a cancellation of all or a portion of your debt, whether it is a mortgage, credit card or other personal loan, the amount canceled is considered income to you," says Anthony Criscuolo, a Florida-based certified financial planner with Palisades Hudson Financial Group. (For those wondering, debt canceled in a bankruptcy case is a different matter, and you won't be taxed for that, Criscuolo says.)

Even a personal loan from a friend or family member that was forgiven is considered taxable income, Criscuolo says.

That said, he adds, "One workaround is to specifically document the forgiven loan as a gift."

If the money is really serious – and in this case, that would be anything over $14,000 – you probably want to bring in a tax professional, and the person who forgave the loan will likely need to file a gift tax return.

Alimony. It may be a lifesaver to get that relief from your ex-spouse, but, alas, "you will definitely be paying a tax on it," says David Hryck, a tax lawyer with Reed Smith in New York City.

But it isn't all bad news. "If you're receiving property payments or child support payments, those will not be taxed," Hryck says.

Renting out a room. Have you used Airbnb or another online site to rent out property? You may (or may not) be in the clear.

"According to the IRS, if your rental period is less than 15 days, you do not need to pay tax on the profits. After 15 days, you should be paying tax on the profits," Hryck says.

Found money. Remember the $20 bill you found? There's actually a name for that situation, Hryck says. It's "the treasure trove tax. Let's say you found an envelope of money. You should be paying tax on the sum. Same would hold true if you bought a car and there was a hidden amount of cash in the trunk," Hryck says.

Class-action settlements. So a bank, gym or phone company or some other business did you wrong by charging fees that were later declared illegal by a court, and you received some money. Great – says the IRS.

If you accept settlement proceeds, "even if they are small, that information is usually reported to the IRS, and the IRS often does come after you for tax on those amounts," Brotman says.

So if you haven't picked up on the moral of the story yet, Brotman, who had the first word, can have the last one as well.

"In short, you should report all the income that you receive within a given year. However, forgetting to report an item or two does not necessarily mean that you are going to get audited," Brotman says. "My advice is to be as careful as you can when preparing your taxes and to make sure that all the larger items are definitely reported."

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