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Know what's taxable or not before filing your return

Cash via Pictures of Money on Flickr
Money courtesy Pictures of Money via Flickr

Most of us can't afford extravagant wardrobes. And we own, at most, one house. But for many of us, there's one thing that most of us share with lavish-living Paul J. Manafort.

We, like the former lobbyist and political consultant, are not fans of paying taxes, especially really big Internal Revenue Service bills.

Rick Gates, Manafort's former right-hand man, today told jurors hearing the tax evasion and bank fraud charges against his former boss that Manafort disliked paying a lot of taxes.

But, I hope, that we aren't following Manafort's alleged method to reduce our tax bills.

Under reporting income: Federal prosecutors contend that Manafort, with Gates' help, failed to properly report all of his earnings.

Gates, seated in the Alexandria, Virginia, federal courtroom's witness stand, echoed earlier testimony from a tax accountant that Manafort opted to classify some of his income as nontaxable loans.

Meanwhile, as the tax trial of Donald J. Trump's former campaign manager continues, the Wall Street Journal reports that Trump's former personal attorney also could be facing tax evasion charges of his own.

The newspaper says investigators are assessing whether Michael Cohen under reported income from his taxi-medallion business. That income reportedly included hundreds of thousands of dollars received in cash and other payments over the last five years.

Taxable vs. nontaxable income: Prosecutors, defense attorneys and ultimately jurors will decide whether former Trump confidants evaded their tax responsibilities.

But the charges offer a good opening for us regular folks to review what the IRS considers taxable or nontaxable income.

Basically, Uncle Sam does get his cut of a lot of our money at tax time. But not all of it. Here's an overview of taxable, nontaxable and may be taxable income.

Taxable Income

  • Alimony. Alimony you receive from your ex-spouse is taxable income, but only through the end of this tax year. Under the Tax Cuts and Jobs Act (TCJA), alimony payments won't be counted as taxable income for tax years 2019 through 2025. Also during those years, alimony payments will no longer be deductible by the payer.
  • Barter payments. Barter income is taxable. This means that if you, for example, build a cabinet system for your dentist in exchange for a root canal, you must pay tax on the fair market value of the dental services. Yeah, I know, tax insult added to dental pain.
  • Bonus from employer. If you receive a bonus, it is in most cases taxable income. Your boss should include the extra income on your W-2 form.
  • Canceled debt. You finally got out from under a big part of your debt when you convinced the lender to forgive it. Sorry, but the IRS isn't nearly as nice in these cases. In most instances, a debt that is canceled or forgiven is considered taxable income.
  • Cash. One of the biggest filing misconceptions is that cash, or at least some of it, is not taxable. Not true. All cash payments for your work are taxable, regardless of how much or little. The confusion comes from the IRS requirement that payers don't have to report such payments if they are less than $600. But that $599 in various dollar denominations you got for pool cleaning services is all taxable. Even if you don't get a 1099-MISC.
  • Gambling payouts. Gambling income is taxable at the federal level to the extent that it exceeds your gambling losses for the year. Some states, however, don't tax certain types of gambling proceeds.
  • Hobby income. Hobby income is taxable. You used to be able to deduct expenses incurred to participate in your hobby from any income it produced. But that was limited by the miscellaneous itemized expense threshold of 2 percent of your adjusted gross income. Now even that is gone, at least for tax years 2018 through 2025, thanks to the Tax Cuts and Jobs Act. If you are making money from your hobby, you might want to consider turning it into a business, where you'll have more expense deduction flexibility.
  • Interest and dividends. This investment income is known as unearned income. But it's still taxable. This is true even when you reinvest the dividends. So are profits you make, at capital gains tax rates, if you eventually sell the assets that are producing the interest and dividends. A key exception here is interest paid on certain government obligations, such as municipal bond interest. These amounts are not taxable by the federal government and, depending on where the bonds are issued, by some state tax departments.
  • Jury duty pay. Jury duty pay is taxable as miscellaneous income. If, however, you turn over your jury duty pay to your employer so that you were still paid while you were off the job serving on a jury, you can deduct that amount.
  • Side hustle earnings. You're still getting a regular paycheck, but you drive for an app-based transportation company or do odd jobs for your neighbors for a few extra bucks. That supplemental gig income is taxable. You might be able to reduce the amount somewhat by claiming legitimate side-hustle expenses. But don't try to just ignore these extra earnings.
  • Traditional retirement plan withdrawals. Money that goes into these accounts is made before taxes are computed. That means that you'll owe the tax that's been deferred while the retirement plan has been growing over the years. This applies to traditional IRAs and basic 401(k) company retirement plans.
  • Unemployment benefits. It's definitely no fun to lose your job. The only thing worse is that when you collect unemployment benefits, that money is taxable.

 

Not Taxable Income 

  • Roth IRA withdrawals. You can take money from a Roth IRA without paying income tax in a couple of situations. First, since you paid tax on the money before you put it into a Roth retirement account, you can take that contributed money out at any time. As for the account's earnings, those are tax-free as long as you are at least age 59½ and have held the Roth IRA for at least five years. If you take the earnings out earlier, you'll owe a 10 percent penalty on these so-called early distributions.
  • Child Support. Money you receive that is designated as child support is not taxable. While tax law regarding alimony will change next year, the tax-free status of child support money will remain.
  • Combat pay. Combat pay is not subject to income tax.
  • Inheritance received. A lot of folks, swayed by political complaints about the misnamed death tax, think that the $10,000 Uncle Buck left them is taxable. It's not. All inheritances are tax-free, at least at the federal level. The estate tax is paid by just that, the estate a person leaves, before any heirs get their bequests. But be sure to check with your state tax department. A few states do tax the recipients of inheritances.

 

Maybe, Maybe Not Taxable Income

  • Gain from the sale of a home. If you sell your home at a gain, up to $250,000 in profit (or $500,000 if you're married and file a joint tax return) is tax free. That means that most of us will never face a tax bill for selling our primary residence as long as we've owned and lived in the home for two of the last five years. However, if you're lucky enough to make an even bigger profit, the amount in excess of those exclusion amounts is taxable. But at least it's at the lower capital gains tax rates.
  • Social Security benefits. If your only source of retirement money is Social Security, those benefits aren't taxable. But if you have other income, either from a part-time job or your own savings or investments, depending on your income you could owe income tax on up to 85 percent of your Social Security benefits.
  • Court awards and damages. These are taxable depending on what the legal payments cover. Any awards you receive for lost pay, punitive damages, business damages or the like are taxable. But damages for physical injury or sickness or for emotional distress are tax-free.
  • Disability benefits. You generally pay tax on disability benefits if your employer paid the disability insurance premiums. However, if you paid the premiums yourself, the benefits are not taxable.
  • Garage sale proceeds. Most garage sale items go at bargain prices, meaning you sold them for less (usually much less) than what you originally paid for them. Since you don't make a profit on the yard sale items, then you don't have any taxable gain. If, however, you sell that painting Aunt Millie gave you and which turned out to be a portrait of her by a young Pablo Picasso (you knew she had a secret life!) for a nice sum, that gain is taxable, again at capital gains rates.
  • Gifts. A gift if just that. It's something you got from someone — often family, but also your very good friends — who just wanted to do something nice for you. In this case, Uncle Sam also does something nice. He says you don't owe tax on gifts you receive. This includes financial gifts, such as money to help you purchase your own home, or other assets, such as a family heirloom you can use to help furnish your new place.

More taxable or not situations: As this overview shows, there are lots of things to consider when it comes to taxable or nontaxable income.

A more complete collection is in IRS Publication 525, aptly name Taxable and Nontaxable Income. The current edition is up to date as far as 2017 taxes, but the IRS will issue an update with the TCJA changes. So bookmark the publication's web page and keep checking.

And remember, if you have any concerns about whether something is legally within the IRS' reach, talk with a tax professional.

It's always wiser and more cost-effective to get the pre-emptive tax help than have to hire a tax accountant or attorney later, like Manafort and possibly Cohen, to deal with IRS tax evasion questions.

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michael j knight

and what does the profession do about a cpa who has immunity but is also engaged in fraud.

why isnt the profession speaking out on that?

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