Nasty Surprises the Federal Income Tax Law has for You

Nasty Surprises the Federal Income Tax Law has for You

You've heard those movie tough guy lines haven't you about how messing with some kinds of people just doesn't pay? You could probably count the federal income tax law among those tough guys. It doesn't matter who you are - ordinary Joe, a Hollywood star like Wesley Snipes - if you don't play by Uncle Sam's rules, you're getting what's coming to you. The only problem is that the federal income tax law is so complex and so Byzantine that often, even experts have a tough time understanding exactly what to do. There was a person who actually sued the government and said that they couldn't expect an ordinary person to pay his taxes if he couldn't even understand the laws he had to play by. He lost, kind of predictably (can you imagine what would happen if the judge ruled that the law really was too complex for ordinary people? No one would pay taxes anymore). The best you can do is to read a few articles on some of the more sticky points to do with the parts of the law that could apply to you. Here are a few of them for instance.

Let's start with unemployment benefits. Many people try to apply common sense to trying to figure out the federal income tax law. Needless to say, that isn't a very reasonable way to go about it. As far as the tax laws are concerned, your benefits are you wages. And the IRS wants its share of it. Is there something you can do to protect your modest income? There's not a whole lot; but you can apply to have your taxes withheld right at the source. All you need to do is to fill out a W-4V voluntary withholding request. You'll end up losing only 10% of each unemployment paycheck. If it seems like 10% is too much for you to be able to afford at this moment, you can just try to pay estimated taxes.

There are other kinds of payments the vulnerable receive that the federal income tax law looks upon as income too. Let's say that you are a single mother; you get by on the alimony checks you receive from your divorce. Does the IRS like you live in peace? Not a chance. The settlement you get in your divorce and all the regular alimony checks are completely taxable. The only thing that the IRS leaves alone is the child support money you receive. Well, at least your ex-spouse has a little reward in all of this. Whenever he or she pays pays you, it is tax deductible for them.

Let's say that there is someone who is in serious financial trouble. They have a $20,000 credit card bill and they have no idea how to pay it off. Luckily for them, they've worked out a payment plan with their credit card company and have had $6000 wiped off their debt. That means they don't have to worry about that $6000, now doesn't it? Well, yes and no. The debt is forgiven as far as the credit card company's concerned; as far as the IRS is concerned, though, that is free money you're receiving. And they will tax it. The credit card company will send a 1099C form to the IRS and tell them on you. There are some kinds of debt though, that don't end up lining the government's pockets. If you have a mortgage debt that you have been forgiven, that isn't taxable in many cases.

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