As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.
Here's list of items that are not subject to income tax.
1. Scholarships: If a degree candidate you can exclude scholarship for tuition and course related fees. Payments receive for room, board, travel or services performed are taxable. Non-degree candidates are fully taxed on any scholarship.
2. Qualified disability payments from a profit sharing plan may not be taxable.
3. Interest on most State & Municipal bonds
4. Social Security & Basic railroad retirement when under income limits (but supplemental RR is fully taxable)
5. Welfare benefits and disaster relief
6. Veterans benefits & certain veterans disability retirement started before 1975. Also payments for combat related injury or sickness.
7. Workers compensation
8. Child support. Foster care payments through govt. program. (restrictions over age 18).
9. Gifts and inheritance (except inherited IRA, tax deferred annuities, and series EE bond interest are taxable)
10. Military allowances-travel, allotments.
11. Military pay while in combat zone.
A. If killed in a combat zone, decedents income tax liability is forgiven for
the tax year in which death occurred and for any earlier tax year ending
on or after the first day the member served in a combat zone in active service.
B. Military survivor benefit isn’t taxable.
12. Rebate on a purchase(car purchase)
13. SAFE program payments for winter energy costs.
14. Accident and health insurance proceeds
15. Clergy housing allowance (is taxable for FICA)
16. Lawsuits settlements, unless related to employment, loss of profits, injury to reputation, and other nonpersonal injuries. Punitive damages and interest on awards are taxable.
A. Emotional distress is taxable if not caused by physical injury or illness.
17. Living expense payments due to casualty loss.
18. Allowances to VISTA, & action volunteers
19. Payments received from a child for room & board.
20. Payment received by foster parent.
21. Life insurance proceeds from death. Annuities & Life insurance cashed in on installments will be partially taxable on the interest they receive.
22. Life insurance dividends are not taxable. Interest on dividends is taxable. Pensions based on combat-related injuries or terrorist attacks may receive tax free treatment.
24. Vouchers for “cash for clunkers” is not taxable. Also Pay-for-Performance mortgage payments are not taxable.
Here's a List of Nontaxable Employment Benefits
- Military pay in a combat zone is not taxable. If combat zone income listed on W-2, must get corrected W-2.
- Military individuals killed in a combat zone, decedents income tax liability is forgiven for the tax year in which death occurred and for any earlier tax year ending on or after the first day the member served in a combat zone in active service.
- Certain amounts received by safety officer killed in line of duty.
- Job Related Educational expenses paid by employer (up to $5250)
- Employers payment of interview expense.
- Minor merchandise gifts ($25) from employer at Christmas.
- Courtesy discounts to employees.
- Company car when used for business use.
- Group hospitalization insurance.
10. Employer contributions to Health Savings Account
11. Long term care Premiums paid by employer.
12. Cafeteria Plans that pay for medical, dependent care or group term life expense. Not subject to FICA either.
13. Flexible Spending arrangements uses for medical, or day care expenses. The use it or lose it concept of FSA accounts now may extend end of year deadline by 2 ½ months. (Not subject FICA).
14. Payments from health insurance plans or profit sharing plans for permanent physical injury even if employer paid for plan.
A. Reimbursement for cosmetic surgery do not qualify for tax free treatment
15. Distributions from Health Saving Accounts as long as used for qualified medical expenses. Report 1040 line 25, form 8889..
16. Nondiscriminatory Term life insurance up to $50,000 ($2,000 for dependents) Only allow for 1 employer.
17. Free legal services plan premiums up to $70.
18. Meals and lodging provided for employer convenience,
19. Child care provided under an approved plan (up to $5000).
20. Employer provided transportation up to $230 a month.
21. Qualified employer paid moving expense.
22. Disability payments received by any individual as a direct result of a terrorist attack against the U.S. or its allies.
23. Company provided retirement planning.
24. Expense reimbursement under a qualified plan.
25. Certain length of service awards under $400 or $1600.
26. Employer provided athletic facilities.
27. Qualified adoption assistance.
Here's a List of Taxable Employment Benefits
1. Benefits Considered Wages. (Usually already in W-2)
a. Wages, bonuses, salaries, advanced pay, back pay, awards, prizes.
Taxable fringe benefits will also be included as wages and may be
shown on box 14 of W-2.
b. Allocated Tips, Fees commissions, bonuses, vacation pay
c. Tips you did not report to your employer including allocated tips
(unless you can prove a lower amount. Call for details)
d. Strike pay (except if made from voluntary contributions to a strike fund,
then benefits are tax free up to the amount of your contributions)
e. Sub pay (except if made from voluntary contributions to a unemployment fund,
then benefits are tax free up to the amount of your contributions)
f. Sick pay, disability pension (before employers mim. Retiremt. age)
g. Expense allowances that exceed expenses.
h. Cash option on stock plan.
i. Pay in form of property or stock.
j. Personal use of employer provided car (should be in W-2).
k. Services or trips - vacations from employer
l. Certain meals and lodging given by employer
m. Certain other fringe benefits that employer incurs costs for.
n. Expense reimbursements under a non-accountable plan.
o. Non-deductible moving expense.
p. Severance pay
q. Wages you received as a household employee for which you
did not receive a W-2 because your employer paid you less than
$1700 are reported under wages, margin entry.
r. Excess salary deferrals (over the allowed limit) & corrective
distributions to a retirement plan are considered wages.
s. Garnished wages or amounts held out of wages are wage income.
t. Wage income incorrectly reported on 1099 must complete form 8919.
u. Taxable portion of dependent care expenses (from form 2441) or
taxable portion of adoption expenses paid by employer.
v. Scholarships for non-degree candidates or Degree candidates who
receive scholarships for other than books and tuition have taxable income.
Other Income and Its Tax Treatment
1. Odd Jobs: The IRS says do not include any self-employment income,
fees received for notary, or non-employee compensation as other income.
Must list on C or C-EZ .
Odd jobs of short duration (usually less than 6 weeks). An odd job may not be considered self-employment if different than taxpayers normal line of work, of short duration, and not one of a series of odd jobs. If they receive 1099 on such a job, to satisfy IRS matching requirements, list on schedule C, offset with equal amount of expense and then list on line 21 as odd job of short duration.
2. Gambling & lottery Winnings
A. Must report full amount of winnings.
B. Can only deduct offsetting losses if they itemize and have records.
C. If winning were split between joint winners, use form 5754 to allocate to
winners. Must also send other party a 1099.
D. Attach W-2G to tax return if federal tax withheld.
3. Jury duty & precinct election duty
4. Prizes & awards are only tax free if in recognition of religious, charitable,
scientific, educational, artistic accomplishment. Contests or services performed
are taxable.
A. Taxpayer can assign the prize to a charity to avoid tax on prize or award.
5. Executors of Estates & Election workers: List income they receive if not done
for profit. Not subject to FICA. Expenses are deducted as misc. item. Ded. subject to 2%.
6. Not for Profit Income: Must include income taxpayer receives from hobby or non-business activity. Can only take expenses if they itemize. Hobby Income is reported as other income and Hobby expenses are deducted as misc. itemized deductions subject to 2% reduction.
A. Exception: If hobby income is from the sale of products, report net gains from sales on schedule D.
7. Rent received for personal property (if not for profit) is included here.
Deduct expenses as other adjustments.
8. Include amounts recovered on bad debts, medical expenses,contributions,
or other expenses deducted in a prior year. If over $3000 ask us how you
can deduct.
9. Amounts received from employer for expenses that exceeded the actual
amounts spent.
10. Payment of debt by another person is income unless it was paid as a gift, (no gifts by employer)
11. Automobile salespersons: An incentive payment made by an auto manufacturer
to retail salesperson is reported as other income and not subject to self employment.
12. Trips, property, and other items received in other than a gift relationship.
Report as wages if business related.
13. Only have to report Taxable distributions from Coverdelle education
accounts here.
14. Debt Cancellation Form 1099C See home repossession section if on a home.
Report amount in box 2 as other income unless they qualify for exclusions below.
(Box 2 should be amount left on loan after deducting value of item repossessed.
If wrong contact bank.)
A. Exclusions.
1. If taxpayer filed bankruptcy they can exclude.
The State only allows exclusion for bankruptcy. Must add back as income
if no bankruptcy involved.
2. Debts discharged while you are insolvent: If your debt is cancelled while you
are insolvent, the cancellation does not result in taxable income to the extent of
the insolvency.
a. Insolvency means that your liabilities exceed the fair market value of your
assets immediately before the debt cancellation. For insolvency use worksheet.
B. How to Report on Tax Return
1. List the exclusion amount on line 2 of form 982 and check the appropriate box on
line 1.
2. If not able to exclude full amount, list any remaining amount as other income
on front of 1040.
15. If taxpayer receives 1099-LTC for long term care insurance, report as income
on form 8853. If used for long term care, take a deduction on form 8853 to offset income.
Deduction is limited to $280 per day.
16. For Health Savings Accounts taxpayer will receive 1099-SA showing a distribution
was made from account. This must be entered on form 8889 and a deduction
taken if expenses were used for medical purposes.
A. If not used for medical purposes income is taxable. Also subject to 10% penalty
if taxpayer is under 65. (20% penalty in 2011.) Exceptions to penalty are death and
disability.
B. Qualified expenses are those that Sched. A covers.
17. Alternate trade adjustment assistance from 1099-G are reported as other income.
18. Embezzled or illegal income, reimbursement of prior deducted expenses.
19. Punitive legal damages are taxable.
20. Treasure—found property is taxable when it comes into the possession of the taxpayer.
Here's a List of Other Taxable Income
1.
Savings interest & dividends (whether received or not), bonds cashed in and interest on tax refunds.
2. State tax refunds if itemized in prior year or elected to claim general sales tax.
3. Alimony received (do not see much in Indiana)
4. Business, royalties, partnerships, rental, farm,administrators of estates pay, trust-estate income.
5. Pensions, annuities, endowments, lump-sum distribution, some life insurance cashed in,
supplemental railroad retirement, part if not all of ESOP distributions (Employee Savings Plans).
6. Some Property Sales or exchanges. Sale of stocks & securities. Stock options depend on the plan.
7. Bartered income including meals & lodging & other non-cash goods & services you receive.
8. Unemployment is fully taxable. (Except for low income taxpayers on the Indiana return.)
9. Social Security & Supplemental Railroad Retirement over specified limits.
10. Awards, lottery, gambling, jury duty, precinct work, prizes, director fees, odd jobs.
11. Embezzled or illegal income, reimbursement of prior deducted expenses.
12. Garnished wages or amounts held out of wages are income.
13. If someone else pays your debts or discharges a debt for a non-gift reason. Banks & credit card companies are required to send 1099 on discharged debts over $600.
14. Punitive damages are taxable.
15. Income received from a hobby or farm for recreation or pleasure must be listed as other income. Expenses can only be taken as itemized deductions. (a possible exception would be the sale of goods can be treated as capital gain).
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.