20 Taxable Income Subtopics You Need to Know About for Better Personal Finance
Taxable income is one of the most crucial aspects of personal finance. It is a subject that affects everyone, regardless of their economic status or profession. In this article, we will explore 20 subtopics related to taxable income and provide you with a comprehensive understanding of each.
1. Taxable Fringe Benefits
Fringe benefits are non-wage compensations provided by the employer to employees in addition to their regular salary. These may include health insurance, transportation subsidies, meals and lodging expenses while on business trips, etc.
While many fringe benefits may be considered tax-free, some are considered taxable income by the IRS. For instance, any cash payments made instead of providing a tax-free benefit would be considered taxable compensation.
2. Unemployment Compensation
Individuals who lose their job through no fault of their own may receive unemployment compensation from the government for a limited period until they find new employment.
Unemployment compensation is generally considered taxable income unless specified otherwise by state law (in seven states). Individuals receiving unemployment compensation should report it on their federal and state taxes.
3. Social Security Benefits
Social Security benefits are payments made to retired individuals or those who have become disabled after working for an extended period under Social Security-covered employment.
Whether your Social Security benefits are taxed depends on your combined annual income (defined as half your Social Security plus all other sources’ incomes). If your combined annual income exceeds $25k ($34k if married filing jointly), up to 85% of your benefits may be subject to taxation.
4. Alimony and Child Support Payments
Alimony refers to court-ordered spousal support paid by one former spouse to another after divorce or separation; child support refers exclusively to financial assistance provided for children’s welfare post-divorce or separation.
Alimony is treated as taxable income for the recipient spouse but can be deducted from the payer’s gross income when filing taxes.
Child support payments aren’t tax-deductible for the payer, nor are they taxable income for the recipient.
5. Gambling Winnings and Losses
Gambling winnings, including lotteries and casinos, are subject to federal income tax withholding at a flat rate of 24%. State taxes on gambling winnings vary by state law.
The good news is that you can offset your gambling losses against your winnings while filing taxes. However, you must have proper documentation of your losses to claim them as deductions.
6. Rental Income and Expenses
Rental income is considered taxable income by the IRS unless it falls under specific exceptions like renting a second home for less than 15 days per year.
Landlords can deduct expenses related to their rental properties such as mortgage interest payments, property management fees, repairs & maintenance costs when filing taxes.
7. Capital Gains and Losses
Capital gains refer to profits made from selling assets (such as stocks or real estate) for more than their purchase price; capital losses refer to losses incurred similarly in sales transactions.
Short-term capital gains (held less than one year) are taxed at ordinary income rates whereas long-term capital gains (held over one year) may be taxed at reduced rates depending on your total taxable income.
You may offset capital gains with capital losses up to $3k/yr ($1.5k if married filing separately), beyond which these carry forward into future years’ tax returns indefinitely until fully utilized.
8. Retirement Plan Distributions
Distributions from retirement plans like traditional IRAs or employer-sponsored 401(k)s are generally treated as taxable income unless they fall under specific exceptions like Roth IRA contributions or qualified charitable distributions after age 70½ years old.
Early withdrawals before age 59½ may also incur additional penalties besides regular taxation unless certain hardship exemptions apply.
9. Foreign Earned Income Exclusion
If you’re working abroad and meet certain criteria set by the IRS (like spending over 330 days outside the US in a year), you may be eligible for the foreign earned income exclusion of up to $107,600 (in 2020) tax-free.
However, this exclusion only applies to earned income (wages or salaries), not investment gains or other sources’ incomes.
10. Business Income and Expenses
If you’re self-employed or own a small business, your profits are subject to taxation as personal income. However, you can also deduct expenses like rent payments, office supplies costs, and employee salary from your gross income when filing taxes.
11. Taxable Scholarships and Grants
Scholarships and grants intended for paying tuition fees or buying textbooks directly are tax-free; however ,if any part of these amounts is used for non-qualified expenses like room & board or transportation, it becomes taxable income.
12. Severance Pay
Severance pay refers to a lump sum payment made by an employer upon termination of employment due to layoffs or downsizing.
Severance pay is generally considered taxable compensation unless specified otherwise through an agreement between the employee and employer.
13. Jury Duty Pay
Jury duty pay provided by courts is considered taxable compensation since it’s similar to regular wages paid by employers.
14. Bartering Income
Bartering refers to exchanging goods or services with others without using money as an intermediary.
Any value received through bartering transactions must be reported on your taxes as taxable income based on its fair market value at the time of exchange.
15. Cancelled Debt
Cancellation of debt occurs when lenders forgive part of borrower’s outstanding debts due to bankruptcy proceedings or loan modification agreements.
Cancelled debts over $600 must be reported on taxes as taxable income unless specific exemptions apply such as insolvent taxpayer status before forgiveness occurred.
16.Royalties
Royalties refer to payments received from licensing copyrighted works such as books, music albums, etc., for commercial use by others.
Royalties are generally considered taxable income unless specified otherwise in licensing agreements.
17. Estate or Trust Income
Estate and trust income refers to income generated by assets held in a trust or estate after the owner’s death.
Such income is subject to taxation and must be reported on taxes filed for the estate or trust.
18. Prizes and Awards
Prizes and awards received through contests, sweepstakes, or other promotional events may be subject to federal tax withholding at 24% of their fair market value.
However, you may also deduct related expenses (like travel costs) from your winnings when filing taxes.
19. Life Insurance Proceeds
Life insurance proceeds paid out due to policyholder’s death are generally not taxable; however, any interest earned on these proceeds while invested might be taxed as capital gains.
20. Workers’ Compensation Benefits
Workers’ compensation benefits provided by employers to employees injured during work-related activities aren’t considered taxable compensation under federal law.
In conclusion, understanding what counts as taxable income is crucial for making smart financial decisions that minimize your tax burden. While this list of subtopics isn’t exhaustive, it covers some essential topics necessary for anyone looking to gain more knowledge about taxable incomes. Working with an experienced financial advisor can also help you navigate complex tax laws better while maximizing your savings potential.