LIFESTYLE & TRAVELBUDGETING

Taxable Income vs. Nontaxable Income: Preparing for Tax Season

The upcoming tax season is going to look different for many people because of the effects of the coronavirus pandemic. As we know for many, their jobs have looked different due to having been furloughed or unemployed. These differences may have an impact on the process of filing their taxes.
The first question to ask yourself is how your income has changed this year? If you are still working from home, or are working on site and receiving your normal income, chances are there will not be many differences. If you have been receiving unemployment for any part of the year, your tax season will potentially look different. Knowing the difference between taxable and nontaxable income can help you prepare.

Nontaxable income

There are a few forms of income that will not be taxed. Below is a list of some of these:

• Cash rebates from retailer or manufacturer or dealer
• Alimony payments (for divorces finalized after 2018)
• Child support payments
• Welfare payments
• Most healthcare benefits

Scholarships can qualify as not taxable if they are being used to pay for tuition, however if they are used to pay for room and board or other personal expenses, they would fall under taxable income.

Taxable income

There are many more forms of income that are taxed. Income can also be earned in more ways than just money. For example, services and property can also be considered income. Below are just a few of the many forms of income that are taxable:

• Wages
• Salaries
• Unemployment payments
• Commissions
• Rental Income
• Alimony (for divorces finalized before 2019)
• Stock dividends and interest
• Self-employment income

Along with income being taxed, there are also some fringe benefits from your employment that can be taxed. Some examples of these would be using a company vehicle for personal use, holiday gifts of cash or gift cards from your employer or a company paid off-site gym. There are many more forms of taxable income and working with a tax advisor when filing taxes is the best way to make sure you are paying taxes on all of the income in your situation.

2020 CARES Act

Another curve ball being thrown our way this year is the 2020 CARES Act. There were two big forms of income many individuals and families received: the $1,200 stimulus check and the weekly $600 that came with those who qualified for unemployment. The stimulus checks are not taxable, along with the $500 checks for eligible parents. This is a tax credit and should not have any effect on the amount of your refund.

However, the extra $600 and any unemployment checks you may have received are taxable. This means if federal or state taxes were not withheld before anyone received this unemployment compensation, taxed will be owed at filing. Again, working with a tax expert to help you navigate this upcoming tax season will be your best route.

The IRS has a tax withholding calculator that can be used to estimate the amount you may still owe in taxes. Follow the directions given on their website and the calculator can be found at https://www.irs.gov/individuals/tax-withholding-estimator

Sources:

https://turbotax.intuit.com/tax-tips/irs-tax-return/taxable-income-vs-nontaxable-income-what-you-should-know/L0h4j5DZQ 

https://www.forbes.com/sites/robertfarrington/2020/05/11/yes-your-extra-600-in-unemployment-is-taxable-income/?sh=7a7fb7fa360d

https://www.irs.gov/individuals/tax-withholding-estimator