One of the biggest sources of confusion regarding federal income tax is what the IRS considers taxable income.
This information is important because it can impact the refund you may receive back from the IRS, or how much you may have to pay back, as well as reducing your tax liability.
Everyone is required by federal law to file an income tax return. The only exception that applies to this rule is if your total income for the year does not exceed certain thresholds.
The amount of income that you earn and therefore must report to the IRS is based on a variety of factors including the type of income, your age, as well as filing status.
There are several different types of income, such as wages from your regular job, salaries from a non-regular job, interest, tips, and commissions. One good way to put it is if the money earned increases your wealth in any way it is considered taxable.
Unfortunately, the IRS is all about figuring out what you owe them each year. They can only determine your worth, so the first step to correctly file your federal taxes is to make sure you are reporting the correct taxable income to Uncle Sam.
Generally, the IRS considers income taxable if it derives from money, services, or property. Net possessions are also sometimes taxable.
The following items are considered taxable in the eyes of the IRS:
There are a number of other fringe benefits and miscellaneous income that you may have to report to the IRS. If you have doubts about a specific type of income, it is a good idea to speak to a tax professional.
Retirees also face a series of challenges when it comes to determining whether or not they need to report Social Security income to the IRS, as well as other retirement benefits like an IRA. You must declare all sources of these types of income on your federal tax return in order to remain in good standing with the IRS.
Now for the good news. There are certain types of income that you do not need to report to the IRS. These include:
Similar to taxable income, there are always exceptions. For example, the money you receive from a life insurance policy is generally not taxable after someone dies. However, when the insurance policy is cashed, a portion of it might be taxed. Similar complicated rules exist for scholarship money.
Once you are able to determine which income is taxable and which income is not, you may now calculate a gross income. Your gross income determines where you fall within certain thresholds. In 2018, all taxpayers were eligible to claim a standard deduction (standard deduction amounts are fixed by the U.S. government before each tax year).
Any taxable income you report that is equal to or less than the standard deduction you qualify for forgives you a portion of that debt. Any reported income above your standard deduction is considered added debt.
The IRS does not require you to file a return in years where your income does not exceed the sum of the standard deduction. However, there are a few rare situations where it still may benefit you to do so.
Reporting taxable and nontaxable income is not always clear. There are many different rules and exceptions that apply, especially in more unique situations when not just claiming wages from a job.
Get the tax education you need with Levy & Associates. Contact us today for an initial, free consultation. Call 800-TAX-LEVY or visit www.www.levytaxhelp.com.
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