Having a hard time deciding what’s taxable and what’s not? You don’t want to overpay your tax bill by reporting income that’s not taxable, but, at the same time, there are stiff penalties for under-reporting income. When in doubt, bring it in and we will help you determine whether an item is taxable. Here are some general rules.
Social security is taxable when income exceeds a certain level. Social security is grossed up by the Medicare premiums paid when reporting on the 1040. The Medicare premiums are deducted on Schedule A.
Taxable income includes wages, bonuses, commissions, overtime, sick time, vacation pay, sick leave, and severance pay. Expense reimbursements are reportable as income unless your employer has an accountable plan.
Nominal noncash gifts such as holiday turkeys are not taxable. Reimbursed and employer-paid deductible moving expenses are also not taxable. Health premiums and cost of up to $50,000 of group term-life insurance coverage is not taxable.
Generally, disability compensation paid by your employer or by an insurance company with premiums paid by your employer will be taxable. Disability compensation for permanent loss or loss of use of a part or function of the body, or for a permanent disfigurement is not taxable. Generally, state disability payments are not taxable.
Disability pensions based on years of service or disability benefits paid to a military retiree in excess of the VA benefits otherwise qualified for are taxable.
Unemployment compensation is taxable and you should receive a Form 1099-G. If an overpayment was received and repaid during the year, the repayment amount can be deducted from the gross amount received. Repayments for prior years cannot be deducted from current year benefits.
Gambling winnings are taxable and must be reported in full. Gambling losses are deducted on Schedule A but only to the extent of winnings. Prizes and awards won in contests are taxable at fair market value.
Amounts received by a degree candidate that are used for tuition, fees, required books and supplies are not taxable. An otherwise nontaxable amount used to pay for room and board will be taxable.
Gifts, including cash, property, below-market sales and forgiven debt are not taxable to the recipient. The donor is subject to gift tax rules. Property received as an inheritance is generally not taxable. Exceptions to this rule include IRA distributions and accrued interest which are taxable to the beneficiary.
An award or settlement is generally taxable if it replaces taxable income. In addition, damages paid for nonphysical injuries such as discrimination are taxable. Punitive damages, other than in certain wrongful death claims, are taxable, even if awarded in a case of physical injury.
Settlements and awards for physical injury including related emotional distress and loss of earnings and earning capacity are not taxable. Damages for non-physical injuries are not taxable up to the amount of medical expenses for treatment of emotional distress.
Proceeds paid on death are not taxable. Accelerated death benefits, unless paid to the terminally ill, are taxable. Interest on life insurance proceeds is taxable as well.
Fees paid to personal representatives, executors, conservators, guardians, trustees or other fiduciaries are included in the recipients’ income.
In general, cancelled debt is taxable. However, canceled debt will not be taxable under the following circumstances:
The 2007 Mortgage Relief Act excludes from income canceled debt up related to your principal residence. There are some limitations, but this bill will benefit those facing foreclosure in 2007 through 2009.
Recoveries of amounts deducted on a previous year’s tax return are includible in income. If the amount is received in the same year paid, the itemized deduction is reduced by the amount received.
Tax law is complex and general rules do not always apply to your situation. Please call us today (619.422.6181) for an appointment to discuss your tax situation or email us at info@brntax.com.