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What Is Taxable Income

18 Jan


Today I will explain what is considered a taxable income. Many people are uncertain whether some types of income are taxable or not.

According to IRS:

Generally, an amount included in your income is taxable unless it is specifically exempted by law.

To put it simply: taxable income is every penny of income you have received in the past year. You can receive income in the form of money, property, or services.

Most people are aware that they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns.

However, many don’t know that they must also report other types of income.
Here are some examples:

  • Self-Employment Income – All income earned through the taxpayer’s business, as an independent contractor is self-employment income and is fully taxable. Some people are mistaken that if the income is under $600 per customer it is not taxable.
  • Childcare providers and babysitters – If you provide child care, either in the child’s home or in your home or other place of business, the pay you receive must be included in your income.  Additionally, fees received for jobs such as housecleaning and lawn cutting are taxable
  • Bartering – Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of services you receive. For example if you are a hairdresser and provide your services in exchange for some accounting counseling done by a CPA, you must report the FMV of services received.
  • Prizes and awards –  the cash value of prizes or awards. Also, the fair market value of products won as a prize or award is also taxable.
  • Gambling winnings – are fully, and definitely taxable. It includes:  winnings from lotteries, casinos, horse races, etc. You may have to pay an estimated tax on the gambling winnings.

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Standard vs. Itemized Deductions

13 Jan

Today I’d like to write about the difference between standard and itemized deductions since it seems to be a confusing subject for many people.

You can get a deduction from taxable income for certain personal expenses or you can claim a standard deduction.

For 2011, the standard deduction is $5,800 for single individuals, $11,600 for a married couple.

Itemized deductions are subtractions from your adjusted gross income (AGI) that reduce the amount of income that is taxed. Adjustments to your gross income (all income received in a given year) are made for alimony paid, contributions to many types of retirement or health savings plans, certain student loan interest, half of self employment tax, and a few other items.

If you choose to itemize your deductions, you can deduct the following expenses:

Medical and dental expenses – you can only deduct the amount that exceeds 7.5 percent of your AGI. Qualified medical and dental expenses are expenses that you paid for yourself, your spouse, and dependents.

State, local, and foreign taxes

Interest payments

Donations to charities – you are able to deduct all donations like: cash, clothes or furniture. Clothes and household goods must be in good condition to get the deduction. Make sure you keep the receipt!

Not all organizations qualify for deductible contributions. You cannot deduct donations given to:

  •     Chamber of Commerce
  •     Political organizations and candidates
  •     Social clubs
  •     Homeowners’ associations

Also, you can deduct 14 cents per each mile you drove your car for charity in 2011 .

Some miscellaneous expenses – include the payments you made to:

  •       Produce or collect income
  •       Manage, conserve, or maintain property held for producing income
  •       Determine, contest, pay, or claim a refund of any tax

For some miscellaneous deductions, only the portion that exceeds 2 percent of the taxpayer’s AGI can be deducted. Other miscellaneous deductions are deductible regardless of AGI.

You should itemize your deductions if itemizing results in a lower tax than taking the standard deduction.


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Estate Tax in the United States

11 Jan

According to IRS, the estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in. The estate tax is based on the fair market value of your assets on the date of death.

Since the 1990s, opponents of the tax have used the derogatory term “death tax”.

If the value of your estate didn’t exceed $3.5 million in 2009, or $5 million in 2010, 2011 and 2012 tax years, then all the inherited assets will pass to your heirs free from  federal estate taxes. The estate tax, have been indexed for inflation for the 2012 tax year such that it will be adjusted to $5.12 million beginning on January 1, 2012.

The $5 million estate tax exemption and 35% estate tax rate are only scheduled to be in effect until December 31, 2012.  On January 1, 2013 the federal tax exemption will be decreased to $1 million and the estate tax rate will increase up to 55%!

What can you do to reduce your potential estate tax?

You can give money away during your lifetime or leave certain amounts to your heirs that are exempt from taxation. In 2011 and 2012 you can give $13,000 to as many people as you want, or you can make the following unlimited donations without triggering the gift tax:

–    Gifts to charity
–    Gifts to a spouse
–    Gifts to a political organization
–    Gifts of educational expenses (must be made directly to the educational institution for tuition only).
–    Gifts of medical expenses (must be  paid directly to the medical facility)

In addition to the federal government, many states also impose an estate tax, called either an estate tax or an inheritance tax.

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Home Office Deduction

10 Jan

If you work out of your home you may be able to claim a deduction for “business use of your home“ expenses. If you meet the specific requirements, you can deduct a percentage of various costs such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and repairs. You can also deduct expenses for improvements of your home office.

You must meet the following requirements to qualify for the home office deduction:

  • Part of your house must be used as a principal place of business.

You must meet your clients at home, or use a separate structure on your property exclusively for business purposes. You cannot take a deduction if you use your home for a profit-seeking activity that is not a  business.

  • You must regularly use part of your home exclusively for business.

You must regularly use a room or other separately identifiable area of your home only for your business. You do not meet this requirement if you use the area for both business and personal purposes.

Even if you meet all the requirements, your deduction may be limited. You can deduct your income expenses only to the extent of gross business income, reduced by business expenses unrelated to the home. Any expenses that exceed that amount may be carried forward.

If you don’t meet the home office deduction requirements you can still deduct some business expenses that you incur at home such as a business telephone line, office supplies, equipment, etc.


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10 Things Everyone Should Know About Individual Income Taxes

6 Jan

1. In 1787, the Federal government was authorized by The United States Constitution to lay and collect taxes, but required that portion of tax revenues be given to the states. Several states adopted income taxes in 1837. The first Federal income tax was adopted as part of the Revenue Act of 1861.

2. Why do we need taxes? Government collects taxes so it can pay for the things we need: roads, schools, hospitals, fire department, police, the military, national parks, etc.

3. Congress and the President of the United States are responsible for writing and for approving the tax laws. The Internal Revenue Service is responsible for enforcing the tax law, for collecting taxes, for processing tax returns, and for issuing tax refunds.

4. Everyone pays taxes based on his/her income including wages, salaries, interest, dividends, investments, pensions, etc

5. Most states have individual income tax with the exception of Texas, Florida, Nevada, Washington, Wyoming South Dakota and Alaska.

6. Even if you are an U.S. emigrant and live abroad, you still must file an US Income Tax Return each year on your worldwide income.

7. Your tax rate changes depending on how much money you make in a given year. The higher is your income, the higher are your tax rates. Federal tax rates in 2011 varied from 10% to 35%.

8. Your tax liability can be reduced by taking advantage of various tax benefits. Government encourages some behaviors by using taxes as incentives. For example education tax breaks are used to promote postsecondary education.

9. Most of the time, income taxes are deducted out of your paycheck. If you paid more that you actually owed, you will receive a refund. If you paid less than you were supposed to, you have until April 15th of the following year to pay the difference.

10. In 2011, 46% of tax filers will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center. Some in that group will even get additional money from the government because they qualify for refundable tax breaks!

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