Financial literacy can help you manage your budget, debt investments, and retirement savings. It involves knowing what types of income are taxable and nontaxable. You can strengthen your financial knowledge through self-study, formal education, and peer networking. Various online platforms and apps offer courses, articles, tutorials, and tools to improve financial literacy.
Reporting Nontaxable Income on Your Taxes
Navigating the complexities of income taxation is a challenging feat. Failing to report taxable or nontaxable income properly is one of the most common mistakes people make on their taxes, but understanding which forms of money count can help you reduce your overall tax liability.
The IRS defines taxable income as money and property from a source subject to federal taxes, such as wages, salary, self-employment earnings, tips, rental income, stock options, dividends and interest, and capital gains from real estate or investment assets. These types of earnings appear on an annual W-2 statement or Form 1099.
On the other hand, nontaxable income is any type of money or property exempt from federal taxes, including alimony payments, child support payments, most health insurance payouts, and most welfare and public assistance grants. This type of income typically doesn’t require a separate tax return. Learn more about reporting nontaxable income on your 2023 return by reading the details in Publication 525 or working with a certified tax professional.
Inheritances
An inheritance is money or property a person leaves behind to their family and loved ones after death. It can include cash, investments like stocks and bonds, or property such as automobiles, art, antiques, jewelry, and real estate. Some inheritances may be subject to taxes, depending on the type of property and the state in which it is located. Nontaxable income includes a variety of sources that are exempt from federal taxation under specific conditions. These may include gifts given to a particular annual exclusion, welfare grants, and specific government benefits such as alimony and child support payments. Certain types of life insurance payouts are also exempt from being considered taxable.
Whether you plan on receiving an inheritance or not, it is essential to understand the nuances of taxable and nontaxable income to optimize your financial planning. Knowing the IRS regulations will help avoid common tax reporting pitfalls and maximize possible savings.
Payroll Deductions
Payroll deductions are wages taken from employees’ paychecks for various purposes. The Payroll deductions can be either taxable or nontaxable and required or voluntary. The order in which payroll deductions are applied matters as well, as some are pre-tax while others occur after taxes have been calculated. Employers’ Form W-4 and IRS tax tables are used to withhold federal income tax, and payroll is automatically credited with FICA (Social Security and Medicare taxes). The amount of the FICA taxes is determined by a percentage of the employee’s gross salary up to the Social Security wage base. In addition, a 0.9% additional Medicare tax is withheld if the employee has year-to-date earnings above $200,000.
Other mandatory payroll deductions are court-ordered garnishments deducted from employees’ wages to pay back debt or child support. Then, the state and local payroll taxes vary by state and are used to fund public programs.
Other Income
The other income section of a company’s income statement can reveal much about its management. Generally, this section lists any earnings from activities unrelated to the business’s core operations that may be subject to taxes. For instance, companies sometimes report canceled loans or inward foreign remittances as other income to save on tax payments. Taxable and nontaxable income differ in many ways, and knowing how to distinguish between them is essential for accurate tax reporting.
Common taxable income types include wages, salaries, bonuses, self-employment earnings, stock options, dividends, and interest. Nontaxable income can include various items such as inheritances, cash gifts up to $18,000 (increasing in 2023), combat pay, child support, welfare payments, and specific types of scholarships.
