When is income taxable, and when is it not?
You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.
Do you know the tax status of other types of income? Here’s a quiz to test your knowledge.
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You tell your son he’ll be the sole beneficiary of your estate, and that you’ve decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he’ll have to pay in taxes. What do you tell him?
Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.
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You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you’re not of retirement age. Do you have a taxable event?
Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it’s not included in your income and you can withdraw it penalty- and tax-free.
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You purchase a piano at an auction and take it home. While cleaning it, you discover $5,000 inside. Is this money taxable to you?
Answer: Yes. Once it becomes yours, “treasure trove” property is taxable to you at fair market value.
When are social security benefits taxed?
Are you considering post-retirement employment? If you’re collecting social security and thinking of returning to the work force, you may have questions about the effect of that income on the taxability of your benefits.
The answer: Under current law, part of your social security benefits may be taxable. How much? The basic rule is that up to 85% of your annual benefits can be subject to federal income tax when your “provisional” income exceeds specified thresholds. Generally speaking, provisional income is the sum of your adjusted gross income plus tax-exempt interest and one-half of your social security benefits.
Benefits are not taxed when your provisional income is below the threshold applicable to your filing status.
The federal thresholds, called base amounts, range from zero, if you’re married filing separately and live with your spouse all year, to $32,000, if you’re married filing jointly.
A $25,000 base applies when you file as single, head of household, or as a qualifying widow or widower with a dependent child. If you’re married, but file separately and do not live with your spouse during the year, you’ll also use the $25,000 figure.
Illustration: When you’re married, file a joint return and your provisional income exceeds $32,000, a portion of your benefits will be taxed.
Please call us to discuss how income from a new business venture or job will impact your taxes. We’ll be happy to help with planning moves, such as the timing of retirement account distributions, that can ease the tax bite.
