Tax season will be here soon, which means your friendly numbers nerds are getting ready! From balance sheets to calculators and everything in between, this is a busy time of year with a lot of moving parts. Tax day, Tuesday, April 17th, will be here in just 162 days. It’s a good idea to think ahead.
When it comes to income, it’s a fairly safe bet to assume it will be taxed. For example, salaries, bonuses, interest and business income are almost always taxable. However, there are some exceptions when it comes to what is and isn’t taxable. This stuff is important to know – different types of income can greatly impact your tax strategies for the upcoming year.
Everyone earns income in some shape or form, and knowing when you should and shouldn’t be paying tax is a must. As a business owner, it’s also important to realize what your employees may need to report on their tax filings, and how this might impact your business’ tax strategy.
To help you with your tax planning, we’re here to help break down which forms of income may be taxable.
The following types of income are taxable, and need to be reported properly:
- Benefits from unemployment
- Punitive damages
- Income from bartering, which is based on the fair market value of the product or service you receive
- Disability insurance income – if your employer paid the premiums
- Fringe benefits you receive for performance of your services – think wellness benefits, company car use, etc.
- Rent payments you receive for personal property – if you are operating your rental activity as a business
- Gambling winnings and cash prizes
However, not everything is taxable. Here are some of the nontaxable types of income:
- Workers’ compensation benefits – unless they are part of your retirement package
- Disability insurance income – if you paid the premiums
- Compensatory damages for getting sick or being injured
- Cash rebates from the dealer or manufacturer of a service or product
- Excluded fringe benefits, such as health insurance, parking and employee discounts
- Child support payments
- Rent money if you rent out your primary or vacation home fewer than 15 days a year. This is important to note if you use popular vacation rental sites, such as Airbnb and HomeAway. Also, note that if you rent it out more than 14 days, the activity is taxable.
- Gifts and inheritances – if your great-great uncle passes away and leaves you his massive stamp collection, lucky you – no income tax!
It’s important to keep in mind these lists don’t include every taxable and nontaxable type of income under the sun, and there are often rules and exceptions that may apply. If you get confused, or aren’t sure if you should really be reporting something, check in with us. We’re here to help.
A version of this post first appeared in Eide Bailly’s Year End Tax Planning Guide.