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The IRS gets to tax more than just your primary wages. Read on to see how far the agency’s reach extends. [[{“value”:”
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Most of us are resigned to the fact that paying taxes is a part of life. And because of this, we’re generally aware that when we earn money, whether it’s from a full-time job or a side hustle, the IRS is entitled to a cut of our pay.
Now, it’s bad enough having to lose a chunk of your paycheck to taxes. But it’s not just job-related earnings the IRS can go after. Here are three lesser-known income sources the IRS can get its hands on.
1. Savings account interest
If you have money in a high-yield savings account right now, you may be pretty happy with yourself — especially if you’re scoring 4% or more on your money, which is what many online banks are paying these days. But don’t make plans to spend all of that interest income just yet.
The reason? The IRS is going to come after a portion of it, which will factor into your tax return next year. (In other words, you won’t have to pay taxes on your interest income month after month in 2024 — but it’ll factor into your total tax obligation for the year when you file your taxes in 2025.)
Worse yet, the IRS taxes interest earnings as ordinary income, which means that interest is subject to your highest tax rate based on the tax bracket you fall into. If you’re earning a lot of money in interest this year, you may want to put a portion of it aside so if you end up having to pay the IRS in 2025, you won’t have to scramble to come up with the money.
2. Dividends
The nice thing about holding dividend stocks in your portfolio is that you get two opportunities to profit. First, you may be able to sell your shares at a price that’s higher than what you initially paid for them. You may also be able to earn money via dividend payments.
But as is the case with interest income, dividend income is subject to taxes. The only difference — and it’s a big one — is that dividend income is taxed more favorably.
In 2024, qualified dividends (most dividends fall into this category) are taxed at a rate of 0% to 20%, depending on your income. And most people will pay either 0% or 15%, since that 20% rate only applies to tax-filers with an individual income above $518,900 or a joint income above $583,750.
3. Unemployment income
Being out of work due to no fault of your own is stressful. Thankfully, in many situations, you can qualify for unemployment benefits to replace a portion of your missing paycheck while you look for work.
Now, you’d think that those unemployment benefits would be yours to keep in full. But wrong — the IRS will come after a portion of that income, even though the whole reason you’re getting it is due to having been booted from your job despite not having done anything wrong. That may be a tough pill to swallow, but it’s important to know ahead of time for tax-planning purposes.
In an ideal world, certain income sources would be off-limits for the IRS. Unfortunately, that’s not the case with these three. It helps to know what income of yours is considered taxable, so you can prepare accordingly.
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