How to Know What’s Taxable
Most people are familiar with income taxes, since we’re all required to file tax returns every year. However, that’s just part of the of a bigger picture. Certain taxes are automatically deducted from your wages when you get paid or when you buy something either in store or online. Some taxes only apply under certain circumstances. Additionally, you might not be taxed on all your income, and your taxable income may be taxed at different rates. Knowing what’s taxable can be helpful to have a firm grasp on the many ways you can be taxed, and where those taxes are going when you’re preparing your tax return this year.
Income taxes and Other Taxes
Aside from federal income taxes, most states charge a state income tax, as do some municipalities and school districts. Here we list some common taxes you might need to pay:
- Employment taxes: Also known as “payroll taxes”, are automatically taken from your paycheck to pay for Social Security and Medicare. Employees pay 6.2% to cover Social Security for the first $132,000 earned, and 1.45% for Medicare on all wages.
- Sales taxes: Sales taxes are collected as a percentage of a purchase of goods or services. They are charged only on the state and/or local level, but the tax rate varies from place to place. Some states have no sales tax, while others may levy a combined local and state sales tax upwards of 10 percent Sales taxes are an example of a regressive tax, since lower earners end up spending a larger proportion of their earnings on them compared to higher earners.
- Excise taxes: Excise taxes are taxes paid on certain goods and services such as alcohol and· cigarettes, one of the most common excise taxes is the one on gasoline, which is taxed by the federal government. Excise taxes are often included in the price of the product.
- Property taxes: Property taxes are levied on the state and/or local level, most often on real estate but sometimes on other large purchases such as vehicles. These taxes are calculated based on the property’s market value, and usually go toward local or county services such as garbage collection, road maintenance and fire protection.
- Estate taxes: These are taxes on the assets you pass on to your beneficiaries after your death, including cash, securities, insurance, real estate and business interests. Not everyone has to pay estate taxes, though: For 2019, only estates worth more than $11.4 million are taxed, and only the value of the estate that exceeds that figure is subject to taxation. Some states also charge their own estate taxes.
- Gift taxes: Gift taxes are like estate taxes but apply to gifts you make to another person or entity while you’re still alive. Only high-value gifts are taxed, and the annual gift exclusion allows you to make gifts at or below a certain value to as many people as you want. In 2019, the annual gift tax exclusion is $15,000 per recipient.
Taxable vs. Nontaxable Income
All the incomeyou receive from any source is subject to federal taxation. This includeswages, salaries, commissions, interest, stock options and dividends,unemployment compensation, rental income and alimony. It also includes fringebenefits, such as company-paid gym memberships, company vehicles and holidaycash gifts from your employer. And it includes other forms of income, such ascanceled or for-given debts or loans, money from offshore ac- counts, propertyyou obtained through barter and payments from employer-paid disability orsickness and injury plans.
A few types of income are exempted from federal taxes. Knowing these exceptions could potentially reduce your tax bill. Some of the most common forms of nontaxable income can include:
- Inheritances, gifts and bequests: Most inheritances and gifts you receive are not taxed. Note, however, that taxes are owed on estates that exceed the federal exemption figure (see above).
- Life insurance payouts: Any money you receive from a life insurance policy when someone dies are nontaxable. If you cash out a life insurance policy, though, that money is generally taxable.
- Qualified scholarship money: Note that while money from a qualified scholarship is generally not taxable, any of that money that goes toward room and board is. J
- Other nontaxable income: Some of these sources include municipal bond interest, most health care benefits, child-support payments, welfare payments and cash rebates on purchases. Reduce your taxes by taking advantage of the full range of exemptions and deductions.
Get your taxes done by a professional
The tax code continues to be complicated, regardless of the many changes done to simplify it.
Most taxpayers are opting to apply the standard deduction rather than itemized deduction method on their tax return, mostly because it issimpler, however it isn’t straight forward.
That’s why every year more taxpayers choose to work with aprofessional, there are many situations where a single missed deductioncould cost a taxpayer much more than a pro’s fee.
If you want to work with a trustworthy tax professional in your area, Freedom Services can help you. Our tax experts have a thoroughunderstanding of the tax code, and how it can affect your tax return.Talk to and let us help you get the maximum return available to you.