I often get questions as to whether payments a client has received are taxable and the answers are often surprising.

Many taxpayers are receiving Form 1099-C reporting cancellation of debt income. In general, cancellation of debt is taxable. Several exclusions are available that you will want to discuss with your tax preparer. Often Form 1099-C is inaccurate, especially when reporting cancellation of debt relating to a short sale or foreclosure on real estate property. If the property was your main residence, you may qualify for the principal residence exclusion.

I’m often asked if cash payments received for work are taxable. Of course they are. All compensation — whether check, cash or barter — is taxable.

Reimbursements for employee expenses are not taxable if part of an accountable plan whereby you submit an expense report detailing your miles, expenses, etc. If you receive a flat amount per month without having to supply substantiation, then this amount will be included in your taxable wages. You will need to offset this income by reporting your employee business expenses on Form 2106 with the total becoming one of your itemized deductions

State refunds are taxable if you itemized deductions the previous year and received a tax benefit from deducting state taxes that were later refunded.

If you have received a settlement for a physical injury, the portion that is for the injury itself is not taxable, although punitive damages and attorney fees related to them are taxable. All other job, workplace, discrimination settlements, etc. are taxable. Attorney fees paid directly to your attorneys are included as taxable income. You then need to deduct the attorney fees as a miscellaneous itemized deduction on Schedule A subject to a 2-percent adjusted gross income threshold. Fair? No.

Insurance proceeds are generally not taxable unless they exceed your replacement costs and out-of-pocket expenses.

Gifts are not taxable to the recipient in most cases, although there could be Gift Tax reporting requirements for the giver.

Inheritances are normally not taxable unless you receive pre-tax monies such as pensions, wages, IRAs, annuities (gain portion) or interest, or dividends earned after the date of death of the decedent.

Instead of making assumptions, it’s best to discuss any potentially taxable situations with your tax professional so you understand the tax ramifications immediately.

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