Your income

Taxable or Not Taxable? – Some of these items may surprise you.

Taxable or Not Taxable? – Some of these items may surprise you.

Here are nine areas of income that are often questioned by taxpayers regarding their taxability. Some items are, others are not. Sometimes the taxable nature of an item depends on other things. Here is what you need to know.

There are a number of areas in the tax code that cause confusion as to the taxability of money received. Here are some of the most common areas of confusion.

Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it. Special rules apply. Make sure you have proper documentation as part of a divorce decree to ensure you can support your tax position.

Child Support. Child support is not taxable to the person who receives it on behalf of their dependent. It is also not deductible for the person who pays it.

Free Services. Free service is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return. If you exchange services, you can deduct allowable business expenses against the value of services provided.

Illegal Activities. Even income received from illegal activities is taxable income and must be reported. Incredibly, the IRS even states that stolen items should be reported at the fair market value on the date the thief stole the item.

Jury Duty Pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.

Legal Settlements. A general rule of thumb with legal settlements is to consider what the settlement replaces. If the settlement revenue replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.

Life insurance proceeds. Generally life insurance proceeds paid to you because of the death of an insured are not taxable. However, there are a number of exceptions to this general rule. For example, if you receive benefits in installments above the value of the life insurance policy at time of death or if you receive a cash payout of a policy you could have taxable income.

Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received. This area has been a major surprise to contestants on game shows and celebrities who have received large gifts at celebrations like the Academy Awards.

Unemployment Compensation. Typically unemployment compensation is to be reported as taxable income. Many are confused by this because of a temporary federal tax law that made unemployment compensation non-taxable during the recent economic recession. This is no longer the case.

Some of these areas can be complicated. What is most important is to realize when to discuss your situation.

Often Overlooked Medical Expense Deductions – Avoid taking the easy way

Because of the paperwork required and the Adjusted Gross Income threshold required prior to taking a medical expense deduction, many taxpayers do not keep track of their medical expenses. This approach could be costing you money. Here are some oft overlooked items.

To take your medical expense deduction in 2012 your allowable expenses must exceed 7.5% of your Adjusted Gross Income (AGI). In 2013 and beyond, unless you are 65 or older, this amount goes up to 10% of AGI. So why bother? You might be surprised at how much this expense might be. Here are some tips:

  1. Don’t take the easy way out. So many think itemizing deductions is such a pain, that they forego the work of collecting valid receipts. Don’t let this happen to you. Collect the receipts and determine if you may be giving away money to Uncle Sam by not itemizing your deductions.
  2. Insurance Premiums. Many insurance premium payments are deductible, including long-term care insurance. Many seniors omit their Medicare Part B premiums because they are automatically deducted from their Social Security benefit check.
  3. Look to your face. Eye care and Dental care are allowable deductions. This includes overlooked expenses for:
    • Eye care: exams, glasses, contact lenses, laser eye corrections, and insurance premiums
    • Dental care: exams, fillings, fluoride treatments, crowns, dentures, orthodontics, and related premiums
  4. Travel expenses. Parking fees, tolls, and mileage to and from appointments also count. So keep a travel log.
  5. Get a prescription. While over the counter purchases are not deductible, if the doctor prescribes the medicine or service it is. So get a prescription for your acid reflux versus buying over the counter meds. Get a prescription for a weight loss program and that could be deductible as well.
  6. Other missed opportunities. Some other commonly overlooked items include; smoking cessation programs, alcohol and drug treatment programs, home remodeling for handicap access, and visits to other health providers (acupuncture, chiropractor, and podiatrist to name a few).

Medical care is very expensive these days, and it won’t be getting any cheaper. It does not take much to make your expenses meaningful tax deductions, but only if you keep track of them.

Your income

Time to Think About Commuting – Don’t leave this benefit on the table

With the high price of gas, wouldn’t it be nice to see a tax benefit to help reduce the cost to get to and from work? Perhaps there is, you may just need to check with your employer.

$3.40 to $4.00 per gallon gas prices are quickly becoming the new norm. Congress and the President appear to be doing very little to control this inflationary cost. What can you do? Thankfully there are commuting benefits that can lower your cost of getting to and from work during 2013.

Transit Passes: up to $245/ month
Van Pooling: up to $245/month
Parking Allowance: up to $245/month
Bicycle Commuting: up to $20/month

How it works

Your employer can provide you the benefits listed above and you do not have to report the benefit on your income tax return. Because the benefit does not hit your W-2, you pay no federal tax, no state tax, no Social Security or Medicare.

Some tips

  • Transit AND parking. Transit passes are good for the train, subway and bus systems and can be used in addition to parking passes. So you can park at the train station, receive a parking allowance AND receive the transit pass benefit.
  • Employer-provided. Remember these benefits are employer-provided benefits. Check with human resources to see if your employer provides these benefits.
  • The salary-reduction alternative. If your employer does not provide these benefits they might allow you to reduce your take-home pay instead. If allowed by your employer, you set aside money from your wages to pay for the passes or parking allowance. This salary-reduction would then allow you to pay for your commuting costs up to the limits in pre-tax dollars. You may not use this method to pay for bicycle commuting.
  • Bicycle commuting only. You may use the $20/ month benefit to help pay for the repair and maintenance on your bike, however you may not receive this benefit in any month that you also receive other transit benefits.

Many employees are unaware that their employer provides a transit benefit, so check it out. Even if they do not, perhaps they’ll consider creating a salary-reduction alternative instead.

New Safe Harbor for Home Offices

Do you have a home office? Are you interested in saving time filing keeping track of your expenses? A new safe-harbor rule effective in 2013 might just make tracking your home office expenses a lot easier. Outlined here are the new rules.

Beginning in 2013 there is a simplified way to take a home office expense for a portion of your home. This new ‘safe-harbor’ option greatly simplifies how to record valid expenses for business use of your home. Here is how it works.

  • You may opt to take your office space square feet times $5 and use this as a valid home office expense up to $1,500 (300 sq. ft.).
  • This replaces the cumbersome allocation of valid home expenses like electricity, heat, depreciation, and other home expenses that are allocated by a % of the home devoted to your office space.
  • You may still take property taxes, mortgage interest deductions and casualty losses as itemized deductions on your personal tax return. Better still, you no longer need to allocate these expenses between personal and business use.
  • Your home office must still qualify for the deduction using current home office standards in the tax code. Foremost among these is that your home office must be used regularly and exclusively by the business.
  • The deduction may not be taken in excess of available business revenue.
  • You may still take other qualified business expenses unrelated to the home. This “safe-harbor” calculation is meant to simplify the household expense allocation process only.

What you should know

  • The IRS estimates 3.4 million taxpayers used 1.6 million hours to calculate the home office deduction’s 43 line form to allocate their home office use.
  • If the IRS reviews these returns in the future it hopes to save a tremendous amount of time and effort used in prior years to confirm the accuracy of the old home office allocation.
  • Since 2013 is the first year of this new provision, you will probably need to conduct the home office use calculation using the old method to ensure the safe-harbor opportunity makes sense for you.
  • One of the nice benefits of this new safe-harbor rule is that your home value (basis) is not reduced by depreciation. This should help reduce risk of a tax surprise from depreciation recapture calculations when you sell your home.