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.
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.
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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