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Tips about Taxable and Nontaxable Income

by | 52 tax Tips and Weekly Financial Blog for 2023

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If there is an income, there usually is a tax on it. Kevin and Melissa understand it very well and
that explains their meticulous planning for the year. This week we discuss what type of income
must be reported on tax returns. Are you looking for a fixed rule about what income is taxable
and what income is not taxable? The fact is that all income is taxable unless the law specifically
excludes it.

Taxable income includes money you receive, such as wages, and tips. It can also include noncash
income from property or services. For example, both parties in a barter exchange must include
the Fair Market Value (FMV) of goods or services received as income on their tax return. And
sometimes your Social Security Benefits are subject to tax as well.

Some types of income are NOT TAXABLE except under certain conditions, including:

Life insurance proceeds paid to you are usually not taxable. But if you redeem a life
insurance policy for cash, any amount that is more than the cost of the policy is taxable.

Income from a qualified scholarship is normally not taxable. This means that amounts you
use for certain costs, such as tuition and needed books, are not taxable. However, the
amounts you use for room and board are taxable.

If you received a state or local income tax refund, the amount may be taxable. You should
have received a Form 1099-G from the state agency that made the payment to you if you
received a state refund. If you didn’t get it by mail, the agency may have provided the form
electronically. Contact them to find out how to get the form. Report any state refund you got,
even if you did not receive Form 1099-G. You must still report it, even if you are not taxed
on it. This is known as the tax benefit rule.

Here are some types of income that are usually NOT TAXABLE:

Gifts and inheritances

Child support payments

Welfare benefits

Damage awards for physical injury or sickness

Cash rebates from a dealer or manufacturer for an item you buy.

Reimbursements for qualified adoption expenses

Alimony payments (divorces decreed after 2018)

Foster Care Payments

Social Security Benefits (Taxable or Not?)

For some taxpayers reaching Social Security age of 62 and older, allows them the opportunity to
start receiving benefits. At age 62 you can start receiving benefits early, but there could be some
reduction in benefits involved if you are still earning a wage between ages 62-67. Monthly
benefits can be paid to a spouse, ex-spouse, children, widow or dependent parents of retired or
deceased workers. Key point, Social Security limits the amount of monthly benefit a family
can receive! This may affect when you start taking your benefits.

You must have 40 quarters (10 years) that you have been paying into Social Security to be
qualified to receive Social Security benefits. These quarters are found by how much you earned,
and how long you worked each year.

If you are earning income and receiving Social Security benefits, you may find yourself paying
taxes on some of your Social Security benefits. Single taxpayers earning over $25,000 will pay
income taxes on some of their social security benefits. Married Filing Joint taxpayers earning
over $34,000 will pay income taxes on some of their social security benefits. As much as 85% of
your social security benefits can be subject to taxation.

This does not mean that you pay 85% tax; it means that 85% of your benefits could be taxed at
whatever your tax bracket is. You have an option of having Federal Income Taxes withheld from
your Social Security benefits to help reduce the amount of tax that may be owed at year end. You
may have to make estimated tax payments on a quarterly basis.

Each year the earnings limit changes, so be sure to see Azmoneyguy or another tax professional
to see if your Social Security benefits are taxable.

Here are some Social Security points to remember:

If you take social security benefits before your full retirement age and you still work, you
may find the amount of your benefits reduced.

If you receive Social Security Benefits you may have to pay taxes.

Remember that you should speak with Azmoneyguy or a tax professional to decide when you
should take your social security benefits. Usually, if you are working you should wait until
you reach Full Retirement Age (according to Social Security rules). If you are not working,
you usually want to take your social security benefits at the earliest age possible. Your tax
professional should be consulted before making a financial decision. You may even be able
to take some of your spouse’s or former spouse’s Social Security benefits!

Social Security limits the amount of monthly benefit a family can receive! Be sure to plan
before taking benefits.

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.

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