Taxable Refunds – It’s Details, Understandings and Taxable or Non-taxable

Taxable Refunds – It’s Details, Understandings and Taxable or Non-taxable

Taxable Refunds – It’s Details, Understandings and Taxable or Non-taxable

Taxable Refunds ,The tax system and all of its mechanisms can be confusing at times and difficult to comprehend for a normal person. But if you put in some effort in understanding the system, it doesn’t seem all that difficult anymore. Of course, there are several aspects of taxes, but we will focus mainly on refunds. When you have paid more taxes than you are liable for, you become eligible for tax refunds, provided you meet all the criterion. Statistics show that about 80% of individuals filing for taxes are eligible for tax refunds in some form or the other. However, the fact that state tax refunds can be taxable, puzzles a lot of the tax payers, who find it in bad taste as they must pay taxes on the refunds that they received.

Understanding State Refunds

Most of us do resent the idea of having to pay taxes on tax refunds, but there is more than what meets the eye. When it comes to taxes, the IRS and the States use the terms Refunds and Overcharge identically. And as you might have guessed by now, overcharge is taxable. Let us take an example where Josh has a $1000 over payment to the state and receives a refund for the same amount. The $1000 is taxable and we will get to the reasons in some time. But if he chooses to pay a piece of the same, let’s say $200 in some charity, the refund now becomes $800. He can use the $200 for tax rebates in the tax filing for the coming year.

The Underpinnings

Here is how it works. When you file your federal tax returns, one of the itemized deductions allowed is the State income tax that you have paid. But here is the thing, you cannot prepare for the state tax returns without going through the federal tax returns. Thus, there are chances that you are not aware of the State taxes that you must pay and IRS asks you to provide a tentative amount for the same. If you have overshot or undershot the amount, you need to address those in the next year tax returns. Before you draw any conclusions, the IRS does help you out in figuring the tentative amount of State income taxes. Keeping the above in mind, let us assume Josh had $2500 to be paid as part of State taxes. But when he filed for the state returns, he finds out that he only owed $1500. Thus the remaining $1000 will act as a tax refund for Josh. To overcome this situation, the IRS allows you to declare the $1000 overpayment as one of your income items.

Taxable or Non-taxable?

The state or local tax refunds are taxable in some cases whereas they are non-taxable in other cases. We will look into both the scenarios now. The most common scenario where you end up not paying any taxes on the refunds is if you do not deduct the same. If you have not itemized your tax refunds as part of the deductions, then the overpayment does not become a part of taxable income for that year. Some people manage to deduct their sales taxes, rather than state tax refunds when it comes to the previous year, thus giving them immunity against taxable refunds.

But if you have itemized the state and local taxes and were able to secure a refund for the previous year, the same amount or overpayment becomes a taxable entity for the current year. Keeping a close eye on the Form 1099-G can help you out in such situations. But even if you do not receive the same, overpayments are taxable.

Taxable Income vs. Nontaxable Income: What You Should Know

Taxable Income vs. Nontaxable Income: What You Should Know

Taxable Income vs Nontaxable Income: What You Should Know

We all have that feeling that the government is always on the lookout for extracting more taxes from us. That feeling is not too far off if you take into consideration the definition of taxable income.

Once all your deductions are taken away from the gross income, taxable income is what is left on paper.

But things can get pretty confusing when it comes to gross income because as per the laws, income from any source qualifies to be gross income.

It becomes extremely important at such times to take some time off and reflect on the different sources of income and see which of them qualify as taxable and which all as nontaxable. So that you are not confused when the next time you win a jackpot or receive any compensation from your work place. Being aware of them also helps you plan for your taxes more efficiently.

You can also save some money on your taxes if you know it well enough which category a specific amount comes under.

Consider this as a rule of thumb, that any amount or source of money that helps increase your net wealth can be taxable.

Taxable Income

Though this list might turn out to be pretty big, we will try to cover as many sources as possible that qualify as a taxable source of income.

  • Salary from your employer
  • Wage from your employer
  • Any form of commission
  • Any kind of fees
  • Interest received on various fronts
  • Dividends from stocks
  • Compensation when you are unemployed
  • Any tips received
  • Awards and bonus (even if any trips are included)
  • Severance package received
  • Any notes that you receive as part of your service
  • Any form of non-cash income coming out of bartering
  • Rent from personal properties
  • Income or loss from gambling
  • Capital gain or capital loss
  • Financial counselling fees that your employer pays for you
  • Stock appreciation rights
  • Any debt that is cancelled or forgotten
  • Royalties received under any category
  • Back pay awards from any settlements

Any fringe benefits that you receive as part of the services that you provide is also taxable. Some common examples of fringe benefits include:

  • Gym membership paid by your employer
  • Gifts that you receive from your company, even in form of holidays or certificates
  • Vehicle provided by company for personal usage
  • Group life insurance if the same exceeds a certain amount.

Nontaxable income

Now you must be wondering, if there is anything left at all for nontaxable income. But in fact there are quite a few categories left, which are nontaxable. They are:

  • Most of the health care related benefits
  • Any child support money
  • Amount received as inheritance or gifts
  • Cash discounts that you receive when shop from a retailer or dealer
  • Any form of welfare payments
  • Reimbursements from qualifying adoptions

Apart from the above ones, there are a few more instances where certain items are nontaxable.

  • If you are the nominee on someone’s life insurance, the amount you receive on their unfortunate death is nontaxable
  • If your boss or employer provides you with any educational assistance, the same is nontaxable up to $5250
  • Certain companies provide financial assistance for adoption of kids, that amount is nontaxable
  • Compensation that you receive as part of any injury or illness that occurred during working hours or any other federal or state level compensation is also tax exempt
  • Earnings from certain types of bonds are non-taxable

Being aware of different taxable and nontaxable sources makes things a little bit easier when it comes to tax planning. The above points should help you assess if a certain source type is taxable or nontaxable so that you can take appropriate steps.

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