Managing taxes can feel like walking through a maze filled with hidden traps—but these traps aren’t always what you’d expect. Taxable events can emerge from seemingly routine activities, and failing to address them properly can lead to penalties, extra headaches, or even surprise tax bills.
Staying informed about these often-overlooked taxable events could make a big difference in your tax situation. In this article, we’re sharing six of the most commonly overlooked taxable events.
6 Events That Could Impact Your Taxes
1. Penalties With Retirement Distributions
Retirement accounts are meant to provide financial security, but distributions from these accounts can create a tax minefield if not properly documented. Any withdrawal from a retirement account must be reported using Form 1099, and the type of account (traditional IRA vs. Roth IRA) directly impacts how the distribution is taxed.
Here’s where surprises happen: If you withdraw funds early, you could face penalties alongside the regular income tax. On the other hand, retirees over age 73 must ensure timely required minimum distributions (RMDs) are made under IRS guidelines. Missing an RMD could result in steep penalties. Being aware of your account type and age-specific requirements is crucial to avoid these hurdles. Misunderstanding even a small detail could cost you dearly during tax season.
2. Errors With Maturing Certificates Of Deposit
For those managing CDs (certificates of deposit) in their retirement accounts, maturing investments can lead to unexpected complications. Typically, interest earned on a maturing CD is straightforward—reportable via Form 1099-INT. However, with rising interest rates driving renewed popularity in CDs, financial institutions may incorrectly report taxable events, even when they aren’t valid.
Here’s the catch: some banks may mistakenly classify a maturing CD as a distribution rather than a rollover. If this error occurs, the IRS might view it as income, even though no taxable event has taken place. A simple mistake like this could leave you scrambling to justify your tax return. Always review tax forms associated with maturing CDs carefully. A misstep here could lead to unnecessary IRS scrutiny.
3. Unemployment Income
If you receive unemployment benefits during the year, don’t assume these payments are entirely tax-free. In most cases, unemployment income is taxable at the federal level and often leads to unwelcome surprises for taxpayers who didn’t opt for federal tax withholdings upfront.
The good news? Understanding this taxable event helps you prepare ahead of time. You can request federal income taxes to be withheld from your unemployment payments as they are distributed or save proactively to cover the amount owed later. Preparation is your defense against unexpected bills.
4. Taxable Gifts
Giving large gifts during the year may seem harmless, but the IRS has strict guidelines regarding gifts exceeding $18,000 per person or $36,000 for a couple. If your generosity crosses this threshold, you must file a gift tax return.
That said, filing a gift tax return doesn’t necessarily mean you’ll owe taxes. Often, these gifts are covered under your lifetime exemption (currently over $12 million). However, failing to file the required paperwork could spark unwarranted scrutiny from the IRS. Ensuring compliance is key here—don’t overlook it!
5. Contemporaneous Documentation
When making deductions, proper and timely documentation matters. Whether you’re tallying charitable contributions, recording mileage, or itemizing other eligible expenses, gathering the paperwork when the activity takes place ensures fewer headaches down the line.
Why the emphasis on timing? Misplaced receipts or incomplete records can invalidate deductions during an audit. While organizations may provide you with replacement copies for charitable donations, the IRS won’t accept them as valid proof for deductions made in prior years. Protect yourself by keeping detailed records upfront—it’s far easier than scrambling after the fact!
6. A New Era of Taxable Events With Digital Assets
The rise of digital currencies like Bitcoin and Ethereum has reshaped financial markets—and also introduced new taxable complexities. From the IRS’s perspective, digital assets are treated as property, meaning any transaction involving cryptocurrency could trigger a taxable event.
Here’s what that means for you: If you sell digital assets, you’re subject to capital gains tax based on how long you held the asset. If you use cryptocurrency to purchase goods or services, you’re creating two taxable events—a potential gain or loss from selling the cryptocurrency and taxable property exchange.
Keeping detailed records of your digital asset transactions is critical, as failing to report them accurately could result in fines or audits. Don’t let the innovative world of crypto catch you off guard during tax season.
Need Help Understanding Taxable and Nontaxable Events?
Taxable events come in many forms and overlooking them can lead to unnecessary financial setbacks. Proactive planning and detailed record-keeping are essential to navigating the complexities of the tax landscape smoothly.
But when it comes to taxes, you don’t have to go at it alone. At Minton CPA & Associates, we specialize in tax planning and preparation for individuals and business owners alike. With our expert guidance, you can stay ahead of potential pitfalls and ensure compliance with IRS requirements.
Let us help you tackle taxable events with confidence! Call us at 757-546-2870 and discover how we can help you minimize your tax liability.