Taxable income it’s a subject you’ll face at least once a year – even more if you file your taxes quarterly. However, you might not have a clue about it, and we’ll explain it to you.
Also, since Tax Cuts and Jobs Act took effect, some tax branches have changed – which means your tax rate might have suffered some changes as well.
Would you like to know what taxable income is and what’s not? How do you measure it? Today we’ll explain it all, so you don’t crack your head next tax season. Start getting ready so tax season 2020 doesn’t catch you off guard!
What’s taxable income?
To make it simple, taxable income it’s the fraction of your total income that may be taxed. Yes, this means some parts of your income are not taxable!
Which income falls in the category of taxable income?
IRS taxes a lot of income, not only annual salaries and hourly wages, like most taxpayers think. If your income fits any of these categories, you’ll have to report it on your tax return next year.
Income: whether you work for someone else or you’re self-employed, your earned income will always be taxable. This includes wages, salaries, commissions, freelance earnings, bonuses and tips.
Winnings: You know how this goes. If you earn a good prize like a new Ferrari, you’ll have to pay taxes for it. You must report any earning for gambling – even the prizes you win in a contest.
Investment or property earnings: Maybe you didn’t worked for your entire income. You made a good investment, or leased a property and earned money. You might ask: is this income taxable? Yes, the IRS will taxes your earnings.
These are taxable income for the IRS:
- Canceled or forgiven debt
- Interest or dividends from investments
- Real estate gains
- Rent from personal property
- Royalties from copyrights and patents
- Stock options
- Unemployment compensation
- Union strike benefits
- Gains of virtual currency (like Bitcoin)
Exchanges or bartered services: Yes, lots of clients get surprised with this taxable income. Suppose you’re a mechanic, and fix the car of an electrician friend in exchange for an electrical repair you need in your house.
According to the IRS, both must file the value of the service provided to each other as an income.
Fringes: A fringe is a benefit your company gives to you. It can be anything from a paid gym membership to a bonus. Like prize winnings, you will be taxed on fringes.
What income doesn’t count as taxable income?
Finally we arrive to the best part! Many, if not most of our income it’s taxable. But, you might not believe this, the IRS doesn’t tax all your income. Here’s what the IRS says is nontaxable income:
- Accident and personal injury rewards
- Cash rebates
- Child support
- Disability benefits
- Federal income tax refund
- Foster care payments
- Inheritances and money gifts
- Life insurance payouts
- Scholarships or fellowship grants
- Social security benefits
- Veterans benefits
- Welfare benefits
However, these income will be tax free only under certain circumstances:
For example, if you receive a monthly scholarship, and instead of using it for your studies, you use it to buy a car, your income will be taxed.
Hire a tax professional and beat taxes
Taxable income, tax deductions, tax branches, tax rates… your head is a mess right now. Clearly, you need tax help for your 2020 tax season.
If your finances are simple, maybe you won’t need aid from a professional tax preparer, you’ll be good on your own. A tax preparation software might be all you need.
Yet, if your taxes are a bit tricky (you have multiple sources of income or you’re a small business owner), working with a tax expert will be your best move. In these scenarios, a missed deduction might cost you tons of money! Even more than hiring a professional.
If you’re looking a tax preparer in the DMV area, we can assist you. Global Tax has been providing Tax Preparation & Accounting Services since 1995, so we have the experience and expertise needed to bring you the quality and value that you always needed.
Our more than 25 years of experience makes us worthy to answer all your questions about the changes in the Tax Cuts and Jobs Act.
Beat taxes with Global Tax!