What Is Taxable Income? What Isn't?
According to the Tax Policy Center, 77 percent of U.S. households faced a tax increase as a result of a budget deal passed in 2013. This increase means the temptation to treat certain items as non-taxable income on a tax return is higher than before.
For some, the problem is ignorance; many taxpayers are unsure about what is taxable income. However, not claiming all taxable income could land you in trouble with the IRS -- not the best of situations from a financial or legal standpoint.
For the majority of people receiving disability, Social Security or child support benefits, the answer of whether it's taxable is no -- but consulting a tax professional is the best move to be sure when determining taxable income. However, other items are often overlooked, whether in the interest of saving money or otherwise. Here are some sources of taxable income to keep in mind when filing your tax return.
As a contractor, you are self-employed. With this comes both a standard income tax and a self-employment tax. The self-employed tax is a Social Security and Medicare tax that is assessed on contractors and other self-employed individuals.
Note that you'll claim income generated from contract work whether you do so as your primary occupation or a side business, provided that you have a net income of at least $400 or meet one of the other Form 1040 filing requirements. You'll also have to pay quarterly taxes.
According to the IRS, gambling winnings are fully taxable income. These include winnings from bingo, casinos, dog races, horse races, poker tournaments, raffles and more. Also included are cash prizes such as lottery winnings.
One that would be easy to overlook is a non-cash prize. If you win a prize such as a car or vacation, you must report the fair market value of it on your taxes.
Note that you may deduct gambling losses, but only enough to offset your winnings. So, if you hit the Atlantic City casinos and win $500 and lose $700 next time around, you could cancel out your winnings and pay no taxes on them. However, the remaining $200 will be treated as money spent and is still taxable.
Gifts that you give to someone else could be taxable. The good news it that you can give up to $13,000 worth of gifts to an unlimited amount of recipients tax-free. That's $14,000 per person, so you could, for instance, buy each of your four grandchildren a $14,000 car without giving a "gift" to Uncle Sam.
Additionally, certain gifts are considered non-taxable income altogether. These include:
- Tuition expenses.
- Medical expenses.
- Gifts to your spouse.
- Gifts to political organizations.
If you inherit an estate that is worth $5 million or more, it will be taxed. To pay this inheritance tax, you'll need to complete Form 706. This is a 31-page form that, at first glance, might make you reconsider accepting the estate to begin with - but if you have to file this form in the first place, the wealth you've obtained should offset the hassle. Note that you must file Form 706 within nine months of inheriting the estate.
Mutual Fund Gains
The sale of mutual funds could be taxable, depending on whether you incurred a gain. When determining taxable income on a mutual fund sale, you'll need to figure out the basis (how much you paid) for the shares you sold. Unfortunately, there are plenty of what-ifs and potential snags when attempting this calculation.
There are two methods of determining basis: Cost basis and average basis. As an example, let's go with the "easier" route of cost basis. Within the cost basis approach, there are two options: Specific share identification and first in, first out. Specific share identification involves identifying the specific shares you sold, which can be cumbersome if you have made multiple purchases at various times. The FIFO method is a bit less complicated, so let's go with that. For example, suppose you made the following purchases into your mutual fund account in 2013:
- March 3: $5,000 purchase of 200 shares at $25 a share.
- May 5: $6,000 purchase of 300 shares at $20 a share.
- Aug. 9: $3,000 purchase of 100 shares at $30 a share.
- $5,000 + $3,000 = $8,000
- $9,450 – $8,000 = $1,450
It's easy to overlook the mentioned items, but doing so is a risky move and could get you in hot water for tax fraud. If you feel overwhelmed with these or any other items on your tax return, seek the assistance of a tax professional. That way, after the filing deadline, you won't have to cross your fingers every time you open your mailbox.