Things You Might Not Know About Income Taxes

Taxes are an inevitable part of life, but most people only scratch the surface when it comes to understanding the U.S. tax system. Whether you're filing your return or just curious about how taxes work, here are some things you might not know about income taxes.

1.       Your Tax Refund Isn’t "Free Money"

A tax refund means you overpaid your taxes throughout the year. While many people look forward to refunds, adjusting your withholdings could put that money in your take home pay instead.

2.       The IRS Can Audit You Years Later

Most IRS audits happen within three years of filing, but if they suspect fraud, they can go back even further—there's no statute of limitations on fraudulent returns.

3.       Side Hustles Are Taxable

Some people think they don’t have to report income that doesn’t get reported on a W-2 or 1099.  Even if you make money from a hobby or gig work, the IRS expects you to report and pay taxes on that income.  Especially if you have been paid in cash, keeping good records and reporting all of your income and expenses is the best way to stay out of trouble with the IRS.

4.       You May Qualify for Free Tax Help

If your income is below a certain threshold, the IRS Free File program lets you file for free, and the Volunteer Income Tax Assistance (VITA) program offers free help from trained professionals.  There are also free tax filing programs provided by “trusted partners” of the IRS that can be found at this link:  https://apps.irs.gov/app/freeFile/browse-all-offers/

5.       Tax Brackets Don’t Mean You Pay That Rate on All Income

If you're in the 24% tax bracket, only the portion of your income that falls within that bracket is taxed at 24%. The rest is taxed at lower rates; some at 10%, some at 12%, and some at 22%.

6.       Gambling Winnings Are Taxable

Win big at the casino or on a sports bet? The IRS wants their cut. Gambling winnings are considered taxable income.  If you are a gambler, it’s best to keep track of all of your losses as you go.  If you win big, you can deduct some of your losses from that year to offset your winnings if you’ve kept good records. 

7.       Student Loan Interest Can Lower Your Taxable Income

You may be able deduct up to $2,500 of student loan interest paid each year, even if you don’t itemize deductions.  There are income limits that you must stay under in order to qualify for the deduction. 

8.       Unemployment Benefits Are Taxed

Down on your luck and lost your job?  If you received unemployment payments, that money is considered taxable income and must be reported.

9.       Even Forgiven Debt Might Be Taxable

If a lender forgives part of your debt (like in a settlement, foreclosure or bankruptcy), the IRS usually considers that "income" and requires you to pay taxes on it.

10.   There’s a Tax Credit for Saving for Retirement

The Saver’s Credit rewards low and moderate-income individuals for contributing to a retirement account like a 401(k) or IRA.

11.   There’s a Tax for Not Taking Required IRA Distributions

If you don’t take the required minimum distribution (RMD) from your retirement account after a certain age, the IRS can penalize you up to 50% of the amount you should have withdrawn.  Be sure to stay on top of your accounts and understand when you can and should take distributions from each one. 

Taxes are complicated, but knowing more about them can help you save money and avoid surprises. Whether you're filing on your own or working with a tax professional, staying informed is key to making the most of your tax situation.