It is important to know when you are filing your federal income tax what types of income are taxable and must therefore be reported to the IRS on your return. After all, completing your income tax filings can be difficult enough for many without the added stress and time of dealing with an IRS audit.
Following is the first of a two-part entry on some of the most common types of income where there is confusion about whether the income is taxable or not.
Alimony and Child Support
These two categories of money are perhaps one of the most often confused when it comes to what is considered taxable versus nontaxable income. As both are payments typically made from one person to another after a divorce, they are both treated the same way, right? In fact, that is not correct.
Alimony, which is intended to address the economic consequences of divorce, is considered taxable income. The person receiving the alimony must include it as taxable income on their income tax return and the person paying the alimony can deduct it on their income tax return.
Alternatively child support, which is intended to help cover the costs of caring for one’s child, is considered nontaxable income. Therefore, the person receiving the child support does not report that money as income on their tax return and the person paying children support cannot treat that money as a deduction.
Likely the most commonly unreported income when it comes to taxes is gambling winnings. All money you win from gambling is considered taxable income and should be reported as income on your tax return. This is true even though establishments that pay out gambling winnings are required to furnish Form W-2G only when the proceeds exceed a certain dollar threshold or are a certain number of times greater than the amount of money wagered.
Gambling losses are deductible from your income taxes but only up to the amount of any gambling winnings you report on your tax return. You cannot deduct gambling losses from other types of income.
Money you receive as a part of a scholarship is classified for tax purposes based on what the money is spent for. Scholarship money used to pay for room and board, travel, or research is considered taxable income and must be reported on your tax return. Scholarship money used to pay for tuition, books, or other direct education expenses are nontaxable so long as you are a full- or part-time student at a qualified educational institution.
Generally if you receive money from an insurance police because the insured event has occurred, the money is nontaxable. This is true whether it is automobile insurance paying you to cover the cost of car repairs or life insurance paying you because of the death of your spouse.
However, if you choose to cash in an insurance policy, the proceeds you receive above what you have paid for the policy are considered income and are therefore taxable.
How to Get Help Filing Your Income Tax
When you are ready to get help filing your federal income tax return, it is important to have someone who knows the tax law. A tax attorney is just that person. A tax attorney is a professional whose business is to know the current tax law. He is also the only one who can offer attorney-client privilege over anything you discuss with him, which means he cannot tell anyone else what you discuss about your taxes.
Therefore, you should call the number at the top of this page and get help with your income tax questions 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.