Unpacking Your Income: What the IRS Taxes and Doesn’t

Not everything that lands in your bank account is taxable. The rules of what is and isn’t taxed might feel like decoding a secret message, but it’s really nothing puzzling. A good citizen should know the distinction between Taxable and Nontaxable Income. Let’s get right into the types of income the IRS taxes and what you can leave off your tax services in Randallstown, Maryland.

• Taxable Income

  Most income is taxable unless a law says otherwise. This includes:

  • Wages and Employee Benefits: Your regular paycheck, bonuses, and benefits from your employer are all taxable. This includes tips, commissions, and financial services too!
  • Investment Income: Earnings from investments like capital gains, stock options, interest, dividends, and even digital assets count as taxable income.
  • Retirement and Benefits Payments: Distributions from retirement plans, pensions, and annuities are taxable.
  • Self-Employment Income: Whether you’re freelancing or running a side gig, any money you make from selling goods or services is taxable.
  • Miscellaneous Income: This includes court awards, damages, reimbursements, and rebates.

Even if you don’t receive a form for some of this income, you’re still required to report it. This holds even if the money goes directly to someone else on your behalf!

• Nontaxable Income

  On the flip side, some income isn’t taxed by the IRS. Here are a few key examples:

  • Financial Gifts: Gifts received from friends or family are generally nontaxable. However, large gifts might require special reporting.
  • Inheritance: Whether you inherit cash, property, or other assets, this is not considered taxable income.
  • Life Insurance Proceeds: If you’re a beneficiary of a life insurance policy, the money you receive is usually tax-free.
  • Income from States Without Income Tax: If you earn money in a state that doesn’t impose income tax, you won’t owe taxes on that income to the state, although federal taxes still apply.
  • Disability and Workers Compensation: Payments for disability or workers’ compensation typically aren’t taxable.
• Why Does This All Matter?

  Understanding what income is taxable and what isn’t helps you avoid underreporting or overreporting your income. Always report taxable income and keep accurate records of nontaxable income, as it may need to be documented even though it isn’t taxed. Tax preparation services in Maryland can help immensely in this regard.

For assistance with anything associated with tax, audit, accounting, and/or the IRS, Baltimore Tax & Accounting Services, LLC has been your trusted business partner since 2006. Contact us today for a fast tax refund in Maryland!