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Taxable Income
Taxable Income
What is taxable income?
What is not subject to income taxes?
Strategies to minimize taxable income
What is taxable income?
Every form of income is taxable unless specifically exempted by law
Examples of taxable income
- wages
- tips
- interest income
- dividend income
- capital gain income
- rental income
- pension payments
- a portion of Social Security benefits (possibly)
- gambling winnings
- unemployment compensation
- alimony
- prizes
- awards
What is not subject to income taxes?
The following items are specifically exempted from federal income tax
- Gifts
- True scholarships (not scholarships with work element)
- Inheritances (but estate subject to federal estate taxes)
- Disability income payments (if policy was paid by worker)
- Employer paid health care and insurance (including long-term care insurance)
- Up to $5,000 in employer paid child care
- Food stamps, Aid to Families with Dependent Children, Medicare benefits
- Payments to crime victims
If one of these items becomes taxable, your tax bill goes up
The Clinton administration planned to help pay for national health care by imposing income tax on previously tax-free employer-provided health care benefits
Strategies to minimize taxable income
Try to maximize tax-free benefits
- Ask for employer to pay for health care or insurance
- Ask employer to provide money for child care
- Ask for these tax-free fringe benefits instead of asking for a taxable raise
These fringe benefits are a sign of a screwy tax system
Companies shouldn't be in the business of selecting or providing health care or child care
But until we get a better tax system, take advantage of these tax-free benefits