First off, I appreciate you stopping by my website to learn more about taxes. I get excited thinking about this stuff and even more excited knowing my writing could have the potential to get other people excited too.
My excitement comes from the ability for us to use this information to make smart decisions based on tax avoidance. No this does not mean, willingly not reporting income to the IRS, or overstating your expenses that is Tax Evasion and it’s illegal. (see IRS worksheet “The Difference Between Tax Avoidance and Tax Evasion“)
Tax avoidance is legal. Tax laws are created to incentivize certain aspects of our culture/economy/family life/communities through making activities more or less profitable for the people conducting those activities. In the USA the more income you generate the more important it is to practice tax avoidance. This is because the USA has a Progressive tax structure.
By consulting with a CPA (and reading my blog!), you will ensure you pay only your fair share and use the remainder to generate even more taxable income to benefit your local economy, family and community.
This blog will cover topics and common mistakes people make without considering tax implications such as:
- Changing jobs from a W-2 employee, to a entrepreneur, or 1099 contractor.
- Comparing one investment to another based on before tax profit/loss, when the After-Tax profit/loss should be analyzed.
- Selling property you hold short term (less than 12 months) could be taxed at 39.6% rate instead of 20% Long Term Capital gains rate if held for 12 months and 1 day.
Without considering tax implications you can put yourself in a less profitable position, and even in a position where you may owe taxes and NOT have the cash to pay them!
Each time you get done reading one of my posts my goal is to get you as excited about taxes, as this baby penguin in his first snow fall! (Okay MAYBE that won’t happen but you’ll be more excited than you are now… I promise!)
This post will cover Gross Income (see Tax Return 1040 Flow below).
An item is included in Gross Income in the year it is constructively received or when the cash becomes available to you, the taxpayer. This includes the receipt of Property or Services, the amount of Gross Income recognized would be treated as the cash amount that would have been required to pay for them (fair market value).
For questions on what 1040 line each of these fall into the IRS has outlined specifics in the 2017 form 1040 instruction draft.
Below I will cover typical Gross Income items. This is a general overview, consult with your personal CPA/Tax Advisor if you have questions. I am hoping to expand on specific areas I feel are important at a later time.
- Wages and salaries (W-2 income)
- Bonuses and commissions
- Fees for jury duty service
- unemployment compensation
- – note this is viewed as a wage substitute and is taxed.
- Bargain purchases of employer merchandise
- extremely below cost discounts from your employer must be claimed as constructively received property or services.
- Any type of fringe benefit, such as using a company car for personal purposes.
- For example weekend use of a company vehicle would be reported at a market daily rental rate multipled by #of personal use days.
- Prizes and awards
- Gambling winnings
- *Illegal drug income (net of COGS)
- – Yes even Al Capone should have paid his taxes!
Scholarships and fellowships
- These are taxable unless:
- The scholarship or fellowship has no requirement for the recipient to perform services, and the full amount is spent on class supplies and tuition.
- Accrued interest on a bond purchased at a discount or zero coupon bond
- Interest on U.S. Treasury obligations
- Interest on Series HH US Savings Bonds ( paid out twice a year)
Dividends – Covered on Schedule B
- I will cover the various schedules in the next post “+/- Adjustments –> Sch B, C, D, E, F”
Rents and Royalties
- Rent collected in advance by a landlord
- Non-refundable deposits collected from tenants.
- does NOT include refundable security deposits
- *Note*- If you have this type of income I highly recommend you become a member of www.biggerpockets.com
- The Bigger Pockets
- Feel free to check out my profile as well. I’ve been an avid podcast listener and blog reader of the site since 2012. I created an account in August 2015 near my college graduation date (December 2015) with the hopes of helping others with taxation questions. Unfortuantely while working full-time and studying for the CPA exam I never made time to contibute to the community and I hope to do so in the future.
Other Items Included as Gross Income
- A bargain discount from exercising a stock options to buy an employers stock for a price below market value
- Proceeds withdrawn from a traditional IRA or pension plan if the initial contributions to the plan were excluded or deducted from income.
- Injury awards
- Lost business profits
- punitive damages
- damages for any non-physical injury such as race or age discrimination
- Note: The following is not gross income and not taxed.
- Damages for bodily injury, pain and suffering along with lost wages
- workers’ compensation benefits
- 85% of Social Security Benefits if the taxpayer earns past a certain earnings cap
- The amount taxed depends on a metric called Provisional Income. This is a persons Adjusted Gross Income before social security + one half of social security benefits + tax exempt income. Generally if this is less than 25K a taxpayer will exclude all soscial security benefits, but others earning generally 60K or more are subject to the maximum 85% inclusion of social security as taxable income.
- State tax refunds if those taxes were claimed as a deduction in previous years.
- Note: Federal tax refunds are not taxed.
- The interest component of an annuity
- If the cost of an annuity is $1000 and it pays out $200 each year for 10 years over ten years the $1000 profit is divided by the total proceeds ($2000) is 50%, so every $200 yearly payment 50% is gross income each year.
- Alimony (This is old information and has now changed with the 2018 tax reform bill)
- Alimony paid in cash or an equivalent (not property)
- have to be seperated from spouse and not living together when the payment is made
- Any portion deemed child support is not taxable.
- Payments must be first applied to child support then the remainder to alimony.
- This was included on the return of both the payer(as a deduction in income) and the payee as a receipt of income.
- Alimony paid in cash or an equivalent (not property)
In the next post I will cover [+/- Adjustments –> Sch B, C, D, E, F] as outlined in the 1040 flow below.
Thanks for reading!
James Yochum– JTheAccountant
The Individual Income Tax Return (1040) flows as follows:
+/- Adjustments –> Sch B, C, D, E, F
= Adjusted Gross Income (AGI)
(Deductions)- Itemized (Sch A) or Standard Deduction
= Taxable Income
*Tax Rate ( which differs for each income tax bracket as outlined below)
+Self Employment Tax
= Tax Due