This is the second in a two-part series on the types of income that is taxable versus nontaxable. The first part is available at Taxable vs. Nontaxable Income, Part 1.
As noted previously, many mistakes on federal income tax returns are attributable to a failure on the part of the individual or the tax prepare to simply known what income is taxable or nontaxable. Failing to report all taxable income could result in fines or penalties from the IRS. Including nontaxable income in your tax return could also result in you paying more tax than you should actually owe.
Read on to learn more about income types where there is commonly confusion on if it is taxable income or not.
Gifts are unusual in how they are treated for tax purposes. The value of a gift is taxable, but not to the person receiving the gift. Rather, the giver is typically the one who must pay taxes on the gift.
There is an exclusion for gifts. As of January 1, 2013, a gift is taxable to the giver only if the value of the gift exceeds the $14,000 exclusion. This exclusion amount applies to each person receiving a gift in a given tax year. So a given individual can give gifts to multiple individuals in one tax year and he will pay no tax so long as the value of an given gift does not exceed $14,000.
Cash rebates on any product or service you buy, whether a fairly inexpensive kitchen appliance from your local home improvement store or a new car, are nontaxable. This is because the IRS views rebates as simply a reduction in the purchase price of the item rather than income.
Damages Awarded Stemming from a Lawsuit
Whether money you receive as the result of a lawsuit are table depends on the reason you are receiving the money. Generally if the money you receive is to replace lost wages or other items of value, the money is taxable. In addition, if the money is the result of a punitive damage against a person or entity, then likewise the money is taxable.
Usually if the money you receive is compensatory, or to compensate you for a loss, the money is nontaxable. The loss could stem from a physical injury or illness.
Employer-Provided Adoption Assistance
Although many benefit provided by an employer to an employee are considered income for tax purposes, money paid to reimbursement an employee for adoption expenses are excluded from this category. This means such funds are nontaxable.
To qualify as a nontaxable amount, the funds must be provided to the employee under an established and qualified adoption-assistance program. If the funds are provided simply because the employer spontaneously decides he wants to help with the adoption expenses, the money will likely be considered a bonus and therefore taxable.
Receiving Assistance with Your Federal Income Tax
If you have questions about how the tax laws apply to your situation or you simply want someone to file your income tax return for you, you can get the help you need by calling the phone number located at the top of this page. A tax attorney will return your call, review your situation, and guide you on the correct answers to your questions and how you can get help completing your return.
Since the first conversation with a tax attorney is free of charge and does not obligate you to anything further, you have every reason to make that call today.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.