Who Is Responsible for Filing and Paying a Deceased Person's Taxes?
Every American citizen is required to pay tax on all income they earn. This rule isn’t limited to your monthly paycheck. It also doesn’t matter whether you received your income in cash, check, goods, or services. As long as your earnings qualify as taxable, then you have to pay your dues in the year you receive your income.
Most sources of income are considered taxable. However, there are some that fall outside the scope of the tax net. Let’s take a look at which forms of income qualify as taxable and which ones don't!
Earned income is any compensation you receive in exchange for products or rendered services. This income may be in the form of money, services, or goods, including property.
Primary examples of taxable earned income are your wages, salaries, and tips. Almost everything you receive from your employer as payment or compensation counts as taxable income. This includes bonuses and even cash payments kept “under the table.”
Payment you receive in exchange for participating in jury duty should also be included in your Form W-2 and is taxed accordingly. You also need to pay tax for any royalty payments.
Nontaxable earned income is few and far in between. Examples include any employee benefits like qualified adoption assistance, child and dependent care benefits, and employer-provided health insurance or contributions. Employer-provided life insurance is also nontaxable, provided it remains below $50,000.
Although considered income, compensation under this category is often freely gifted by friends and family. Payments as ordered by the law also fall under this group.
The IRS requires you to pay tax for most court-ordered payments. This includes some alimony or spousal support payments, lost pay, punitive damages, and business damages.
Alimony payments ordered by the court after December 31, 2018, are now considered nontaxable. Child support, combat pay, and any payments you receive for damages, including physical injury or emotional distress will not be taxed by the IRS.
Gifts worth below $15,000 and inheritances amounting to less than $11.7 million are also nontaxable.
Money that you earn through the sale of stock, real estate, dividends from bonds, and capital gains are considered investment income. Retirement accounts, like the 401(k), also count as investment income.
Interest payments, stock options, long-term capital gains, and qualified dividends from profit shares qualify as taxable. This also includes any interest you may earn from your bank savings accounts and offshore accounts.
The IRS considers municipal bonds and dividends from a return of capital as nontaxable. 401(k) investments and many other retirement accounts are nontaxable unless withdrawn.
This category includes all other sources of income or compensation, such as gambling winnings, interest from inherited assets, and employee fringe benefits.
The IRS levies a tax on all legal gambling winnings. Aside from casino gambling, this also applies to your winnings from lotteries, sweepstakes, horse races, sports bets, and game shows. Take note that if you itemize your tax deductions, you can include gambling losses in the list. However, this is only applicable up to the amount offset by any winnings.
Employee fringe benefits, such as paid off-site gym memberships, company vehicles for personal use, and gift certificates, are also taxable. Scholarship money used on room and board gets taxed as well.
Inheritances may be considered either as other income or gifts received. Regardless of the category it may fall under, it is still nontaxable. Take note, though, that if the cash inheritance you receive earns interest, this counts as taxable other income. Part of your Social Security retirement income may count as nontaxable, based on your other sources of income.
Tax liability may sound complicated but it simply refers to the total payment or taxes you may owe to the IRS. This includes all other forms of taxes aside from income tax, such as sales tax, capital gains tax, estate tax, and more.
Here are some ways to help you minimize your tax liability:
Understanding taxation can be a challenge. As helpful as this article may be, this is still an introduction to taxable and nontaxable income. While this information can help point you in the right direction, seeking professional tax advice is always a better option.
If you have any questions or want more in-depth information regarding taxable and nontaxable income, contact Core Group today. We’ll gladly help you navigate your finances and taxes for optimum savings and income growth. www.coregroupus.com