Some of these items may surprise you.
There are a number of areas in the tax code that cause confusion as to the taxability of money received. Here are some of the most common areas of confusion.
Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it. Special rules apply. Make sure you have proper documentation as part of a divorce decree to ensure you can support your tax position.
Child Support. Child support is not taxable to the person who receives it on behalf of their dependent. It is also not deductible for the person who pays it.
Free Services. Free service is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return. If you exchange services, you can deduct allowable business expenses against the value of services provided.
Illegal Activities. Even income received from illegal activities is taxable income and must be reported. Incredibly, the IRS even states that stolen items should be reported at the fair market value on the date the thief stole the item.
Jury Duty Pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.
Legal Settlements. A general rule of thumb with legal settlements is to consider what the settlement replaces. If the settlement revenue replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.
Life insurance proceeds. Generally life insurance proceeds paid to you because of the death of an insured are not taxable. However, there are a number of exceptions to this general rule. For example, if you receive benefits in installments above the value of the life insurance policy at time of death or if you receive a cash payout of a policy you could have taxable income.
Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received. This area has been a major surprise to contestants on game shows and celebrities who have received large gifts at celebrations like the Academy Awards.
Unemployment Compensation. Typically unemployment compensation is to be reported as taxable income. Many are confused by this because of a temporary federal tax law that made unemployment compensation non-taxable during the recent economic recession. This is no longer the case.
Some of these areas can be complicated. What is most important is to realize when to discuss your situation.