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It’s no secret that most income is taxable and must be reported on your federal income tax return. However, did you know that even your state income tax refund may be taxable as income? At the peak of individual income tax preparation season, let’s review what income is taxable and what is not to help you file an accurate tax return.
Most taxpayers realize taxable income includes money they earn, like wages, tips, business income, interest and dividends. But taxes may also be due on various other payments taxpayers receive. Among the most commonly overlooked sources of taxable income include bartering, tax refunds and scholarships.
Bartering income: In today’s online marketplace the popularity of bartering is booming. Bartering is an exchange of property and services. In fact, it’s so popular that the primary business of some businesses is facilitating and documenting bartering between businessess. As far as income tax is concerned, the fair market value of property or services made through bartering is taxable as income whether or not that bartering occurred online.
State income tax refund: Many taxpayers don’t realize that even a state or local income tax refund may be taxable depending upon whether you itemized your deductions. If you did not itemize your deductions on your federal tax return for the same year to which your state or local tax refund applies, you do not have to report the refund as income. But, if you received a state or local income tax refund this year relating to an itemized deduction you filed in an earlier year, you may have to include all or part of the refund as income on your tax return. You may have received a Form 1099-G detailing this income. Whether or not you owe taxes on it, you must report the refund on your federal tax return.
Scholarships: Many taxpayers who receive scholarships helping them pay their education costs don’t realize that the scholarship payment is tax free only if it is used to pay for certain costs, like tuition and required books. But, the portion of the scholarship money that is used for room and board is taxable income.
Other income may or may not be taxable depending upon a variety of circumstances. Here is a review of some other common income sources that raise the most questions.
Life and Disability Insurance: Life insurance proceeds received upon the insured person’s death are usually not taxable. However, if you redeem your own life insurance policy for its cash value, the amount you receive exceeding what you paid for the policy is taxable. Disability Insurance payments may also be taxable in many instances. Businesses often overlook that they must also report this income paid to employees.
Court awards: Court awards or settlements for personal injury or sickness are usually tax free, but punitive damages or compensation for lost wages are usually taxable.
IRAs: Money you take out of an IRA may or may not be taxable depending upon the kind of IRA. Money taken out of a traditional IRA is generally taxable, but money withdrawn from a Roth IRA is usually tax-free.
Some income is only partially taxable or is not subject to any income tax. For example, child support payments, gifts, inheritances, and welfare benefits are usually tax-free. Unemployment benefits are taxable income. Social security benefits below certain income levels are usually tax-free. However, once the taxpayer’s income exceeds a certain level, taxes are due on the benefit exceeding the income limits.
Today, the tendrils of taxation twist through and attach to a wide range of income sources. If you need more information about how taxes may affect income you have received, please contact McRuer CPAs for more information.
