Top Ten Tax-free Incomes

When it comes to recording your income it can get pretty tricky. It’s hard to know what the government considers as taxable income.  Actually, did you know that some income is not taxable – or tax-free? This month we would like to tell you about ten types of income that are not considered taxable by the government, which means you don’t have to report it on your taxes.

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  1. Gifts.  You can receive up to $13,000 per year as a gift from one person, and you can receive gifts from multiple people in a year.  This means that if you received $13,000 from your grandmother and $13,000 from your uncle that would be $26,000 of income that would not be taxable to you.  However, there is a down side. The gift is not tax deductible to the giver.
  2. Rental Income. You can rent out your home for up to 14 days without having to report your income.  So if you rent out your home as a vacation rental or if your rent it out for a special occasion like a film festival or community event, the income is not taxable as long as it is under the 14 day limit.
  3. Children’s Income.  Children under the age of 18 can earn up to $5,800 dollars in wages before it is taxed.  If the child earns more than this, the income could be taxed on the parent’s tax form.  Also if you have a business, you can pay your child from the business too.  This can create a great tax deduction.
  4. Inheritance.  When you inherit money, that money is not taxable.  However, if you inherit property and then sell it, the income from the sale may be subject to capital gain tax.
  5. Roth IRA Earnings.  Income from this type of retirement is not taxable.  But you have to make sure you are following the rules of a Roth IRA or they might be subject to tax.
  6. Life Insurance Received. If life insurance is paid to an individual, the full value of life insurance is not considered taxable income. However, there may be some tax involved if the insurance is paid to a trust.
  7. Child Support.  Money you receive for child support is not considered taxable income and should not be reported.  But be aware that money received from alimony is taxable income.
  8. Home Sales Gains.  Money received from selling a qualified principle residence is not taxable.  There is a limit to the amount that is not taxable.  The limit is up to $250,000 for singles and $500,000 for married couples filing a joint return.
  9. Scholarships and Fellowships.  Money awarded to students to pay for tuition, fees, and books is not considered taxable income.
  10. Tax Refunds.  Federal refunds are not taxable because you have already accounted for this income on the previous year’s tax return.  Most state refunds are also tax-free for non-itemizers.

So there you have it, the top ten tax-free sources of income.  If you have any questions feel free to contact us.  Also, you can check out our website avoidbeingaudited.com for some great advice and free information about business finances.

Article submitted by Matthew Anderson of Soulence Tax and Accounting.

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Understanding the Tax Treatment of Loans

Every year at tax time, we have several clients that are business owners who come in and hand us a stack of bank statements. They say that all of the deposits are what their income is.  So we carefully add up all of the deposits, place the figure on the tax form and then deduct all of the expenses.

When we are done, we tell the client how much they made last year and what they owe in taxes. Nine times out of ten, the client gets a look of horror on their face and tells us they can’t possibly have earned that much money – there must be something wrong.  We then ask them to go back through the deposits and determine if any of them are proceeds from a loan. 

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Almost always they have included money deposited from a loan or credit card advance. The trouble is that loan proceeds are not a taxable event. If you borrow money, it is not considered income.  Similarly, if you loan someone money it is not a tax deduction.  This is a common misconception.

It is also difficult for many people to know where to put these types of transactions in their bookkeeping.  Loaned money can be tricky to record because there are many different types of loans. To show you how diverse loans can be and to help you make sure you are recording your loans correctly in your bookkeeping, here are some questions you can ask yourself:

  • How do you handle proceeds from a small business loan or personal loan?
  • Where do you record purchases made on a credit card?
  • Where do you record payments made on loans and credit cards?
  • Where do you record a loan your company makes to another company or individual?
  • How do you record an advance to an employee?
  • What about the interest you pay on loans or credit cards?

If these questions are not answered correctly, it can cost you thousands of unnecessary tax dollars because you could be counting loans as income.  Also, you might create an unnecessary red flag on your tax return if you are counting the loans you give out as a tax deduction.  So if you are in business, you really need to know how to record loans properly.  We have a great CD course that teaches people how to record their loans as well as other bookkeeping and tax tips. To learn about our program visit http://www.avoidbeingaudited.com/.

Understanding Tax Implications of Bad Investments and Bad Dept

In the past couple of years, bad debts and theft losses have become almost commonplace. Years ago we rarely ever saw a bad debt or theft loss on a tax return. But today, between the economy, fraudulent investments, and failing businesses, these debts are everywhere.

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To understand how to deduct these bad debts you need to understand the differences between bad debts that can happen on an individual tax return and those that can happen on a business tax return.  Let’s look at individual bad debts first.

Most bad debts that occur with an individual’s finances will end as a capital loss, which is limited to $3000 a year or to only go against passive gains.   For example, if you invest or loan money to a business, buy stock in a business, or put money into a failed investment, all of these are considered capital losses and fall under the $3000 a year limitation.  The only way to deduct more than $3000 a year, other than having passive gains, is to prove the bad debt happened because of theft, fraud, or casualty losses.  In order to prove this one of the following things must happen:

  1. The person or business you loaned or invested money has to have been indicted by the SEC, FBI, or other federal or state agencies.
  2. The principles involved in the business or investment have been arrested and put in jail.
  3. An unforeseen natural disaster is the cause of the loss.

A business bad dept is a little easier to prove and write off.  If your business loans money or invests money and the money lost any of the above mentioned circumstances, it can be used to claim the bad debt.  But in addition to the reasons listed above, the business can deduct a bad debt if the business makes an attempt to collect and the attempt fails.  There has to be some sort of documented attempt.  A few phone calls will not be sufficient.  The best way is to hire an attorney to attempt collection.  You don’t have to spend thousands of dollars or spend years trying to collect.  Make a reasonable attempt, and as soon as it is obvious you can no longer collect the money, the business can write off the bad debt.

One additional thing to keep in mind is that in order to deduct this type of debt on your taxes, you need to have documentation that there was an exchange of money such as a cleared check, wire transfer documentation, etc.  There also needs to be an agreement as to compensation, such as a note or business agreement.

Claiming this type of loss on your taxes is a delicate and thorough process. Knowing that the individual or company is having a rough time and being pretty sure you won’t get your money back is not enough. You need to be able to prove to the IRS, if necessary, that you did everything in your power to get reimbursed. Then, in the year you determine it a lost cause, you can claim the bad debt.

To learn more about bad debt, bad investments, and other tax strategies you should be taking advantage of, visit avoidbeingaudited.com.