10 Tax Surprises That Could Catch You Off Guard and Affect Your Wallet

Your tax bill could be larger than expected thanks to transactions and issues you didn’t know were taxable events. They don’t impact everyone but they can lift your tax bill in unexpected ways when they do apply to you.

These 10 actions are taxable, meaning they can increase the amount you’ll owe to the Internal Revenue Service (IRS).

Key Takeaways

• You must pay taxes on gains even if you don’t sell an investment.
• You could pay taxes on 85% of your Social Security benefits if you have enough other income.
• Lottery and gambling winnings are taxable.
• Unemployment benefits are taxable as regular income.

#1 Capital Gains When You Didn’t Sell

You must report capital gain distributions on your tax return and pay a tax on any gains made even if you don’t sell an investment.

“Many clients understand that selling an investment within a brokerage account (individual, joint, trust) at a gain triggers taxes. However, what often surprises them is receiving a capital gain distribution on their 1099 even when they haven’t sold any investments,” says Dave Flegal, a certified public accountant and financial planner at Flegal Financial Planning.

He went on to say that clients must report these capital gain distributions on their tax return and pay tax on the gain.

Important

You can expect to pay a tax on any gains earned in your investment account if you have money in a mutual fund or ETF.

“These distributions come from mutual funds and ETFs, which are required to pass along gains from sales made within the fund,” Flegal says. “Actively managed mutual funds tend to generate higher capital gain distributions than ETFs, making tax efficiency an important factor when selecting investments.”

#2 Social Security Benefits

Did you know you often owe taxes on Social Security benefits? In fact, up to 85% of your benefits may be taxable if they meet the following requirements, which depend on your provisional income, including adjusted gross income (AGI), nontaxable interest, and half of Social Security benefits and if you’re:

• Filed single, head of household, or qualifying widow or widower with more than $34,000 income.
• Married filing jointly with more than $44,000 income.
• Married filing separately and lived apart from their spouse for the previous year with more than $34,000 income.
• Married filing separately and lived with their spouse in the previous year.

If you’re single and your income is between $25,000 and $34,000 as of tax year 2024, just 50% of your Social Security benefits are taxable. You must also pay tax on 50% of your Social Security benefits if you’re married and your income is between $32,000 and $44,000 as of tax year 2024.

One of Flegal’s retired clients was surprised by the higher taxation of his Social Security benefits.

“In the prior year, his provisional income was low enough that less than 85% of his Social Security benefits were taxable. This year he received an unexpected large capital gain distribution from his investments which increased his income and resulted in a larger portion of his Social Security being taxed,” Flegal says. “He wasn’t thrilled about the surprise tax bill but unfortunately, there was little he could do since he had no control over the capital gain distributions from his investments.”

#3 Money Withdrawn From IRAs and 401(k) Plans

People may be surprised to find out that they owe taxes on the money they take out of an individual retirement account or 401(k) plan.

“Some people are not aware that money eventually taken out of their IRA and 401(k) accounts will be included in their taxable income,” says Crystal McKeon, the chief compliance officer and certified financial planner at TSA Wealth Management. “There are also those who understand that taxes will be taken out but don’t really start planning for the taking of those funds and thus can get hit with a big, unexpected tax bill.”

Growth in the account is tax-deferred with a traditional IRA and you can make contributions tax-free by claiming a deduction for the income you invest in the year you contribute. You’ll then pay taxes on both growth and income when you reach retirement age of 59½ and take withdrawals from the account. Your withdrawals will be taxed as ordinary income.

You must pay taxes on your contributions to a Roth IRA when you make them. However, contributions to the account and earnings then grow tax-free. You can take tax-free withdrawals from a Roth IRA at age 59½.

#4 Investment or Bank Bonuses

That bonus you got from your bank or investment company may be nice but it’s not tax-free.

“My clients are sometimes surprised when they receive a tax form for a banking or investment account “bonus.” That bonus is not free, but taxable income,” says Maggie Klokkenga, a certified financial planner at Abundo Wealth.

Swapping investment firms may get you a bonus but that bonus is counted as taxable income.

“I had a client who received a $3,000 incentive for moving his accounts from Vanguard to Fidelity, and on his 2024 composite Form 1099 from Fidelity was Other Income of $3,000. I always make sure to let my clients know that they can pursue getting that cash bonus but to also know that it’s not free,” Klokkenga says.

#5 State Income Tax Refunds

A tax refund is applied to your federal tax debt in the next year if you receive one from your state.

“If you itemized deductions on your prior year’s tax return, your state tax refund may be taxable on your federal return the following year,” says Jovan Johnson, a certified financial planner at Piece of Wealth Planning. “For example, if you itemized in 2023 and received a state tax refund, that refund could be included in your 2024 federal taxable income.”

#6 Lottery and Gambling Winnings

You’ll have to pay taxes on your winnings if you get lucky at the lotto or bet on the big game.

“Whether it’s from a casino, sports betting, or fantasy leagues, any winnings are taxable, and the IRS expects their cut,” says Jake Skelhorn, a certified financial planner at Spark Wealth Advisors. “Even if it’s cash, you’re expected to report it!”

#7 Unemployment Benefits

Your unemployment benefits may have gotten you through a tough time, but they’re not tax-free.

“While (unemployment benefits) may seem like a government assistance program, the IRS taxes them as regular income,” says Filip Telibasa, a certified financial planner at Benzina Wealth.

#8 Debt Cancellation and Loan Forgiveness

Having a debt canceled or a loan forgiven can give you a fresh start on your finances but that fresh start is taxable.

“If a credit card balance, car loan, student loan, or even a personal or family loan are canceled or forgiven, it could be recognized as taxable income (and reported on Form 1099-C),” says Jarrod Winkcompleck, a certified financial planner at Gap Financial Services. “Generally, any forgiven amount that is greater than $600 is considered taxable income.”

#9 Crowdfunding and GoFundMe Donations

Raising cash for someone in need is a noble task but those donations could be taxable if you aren’t careful.

“If you or someone (for you) is raising money for medical expenses or to replace a lost income, the donations must be clearly marked as ‘gifts.’ Otherwise, the IRS may interpret this as taxable income,” says Scott Brown, founder of Caregivers Resource Group.

#10 Payments Through Mobile Apps

Mobile apps like Venmo and Cash App make it easy to get paid but you’ll have to pay taxes on amounts you receive that are greater than $600.

“Starting in 2024, the IRS required reporting of transactions over $600, This is total throughout the year, not just individual transactions,” Skelhorn says. “If this money was paid to you for side work or services provided, it is considered taxable.”

The Bottom Line

You might not expect that these 10 items are taxable, but they all are. You must pay taxes on everything from government programs such as Social Security benefits and unemployment benefits to debt cancellation and loan forgiveness, subject to some complex rules. Even something as simple as a bank or investment bonus is a taxable item.

Payments through mobile apps are taxed if they’re above $600. Crowdfunding and GoFundMe donations may be taxable if not marked as gifts. Lottery winners and sports gamblers owe taxes on their winnings. You can prepare when you know these 10 items that trigger taxes.