When filing your taxes, you must report all your incomes on your federal income tax return. However because of some exceptions, some of it is not taxable. Most people are confused about the difference in what is taxable and what actually falls under the IRS’ exceptions.
In fact, according to the IRS, all income is taxable unless the law specifically excludes it. Indeed, some income is only partially taxable while some other is not taxable at all. Taxable income includes the total amount of income in the form of money, property, or services collected by an individual or a company on which the income tax will be calculated.
The following incomes are taxable:
– Employee wages
– Fringe Benefits
The following incomes are usually tax-free:
– Child support payments
– Welfare benefits
– Damage awards for physical injury or sickness
– Cash rebates from a dealer or manufacturer for an item you buy
– Reimbursements for qualified adoption expenses
While some income is tax-free, some others are only partially tax-free. For example, Social Security benefits are usually tax-free, unless your income is above certain levels. You will then have to pay tax on part of your benefits. Also, punitive damages or compensation for lost wages are usually taxable. As another example, if you take out money of a traditional IRA, it will be taxable. However, if you take money out of a Roth IRA, it will usually be not taxable. Life insurance proceeds are also usually tax-free, unless you redeem a life insurance policy for cash. In that case, the amount that is more than the cost of the policy is taxable. Furthermore, while using a qualified scholarship for certain costs such as tuition and required books is not taxable, using it for food and board is taxable.
Follow these Internal Revenue Service tips when filing your taxes. This way you will help you make the most of your tax return!
If you have any question, contact ABIP today. One of our team members will answer any concern you may have.