Your income can come from various sources, including employment wages, business income, investment returns and even lottery winnings. As you receive money, it is important to recognize what you are required to report to the IRS and the amounts subject to federal taxes (and sometimes state and local taxes as well.) Understanding these concepts can help you plan for tax efficiency throughout your life and enable you to pass those savings on to your heirs after you are gone.
Earnings you receive as an employee, an independent contractor or a business owner are subject to federal taxes at rates as high as 37 percent, based on your filing status and your modified adjusted gross income (MAGI). You may be surprised to learn that the unemployment compensation you receive when you are out of work and looking for a new job generally is also considered taxable income. In addition, you will be subject to tax on any debt canceled for less than the amount you owe, perhaps because you negotiated a payment plan on an outstanding credit card balance or medical bills. Finally, those lottery winnings you were lucky to collect are treated like gambling proceeds and, therefore, subject to income tax.
For many people, income tax on earnings is levied at the federal and state levels. However, if you live in one of nine states without a state income tax, you can keep more of the money you earn. Those states include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
The property you receive as a gift or inheritance is not subject to tax on the federal level. However, federal taxes are assessed on income and dividends generated by the property gifted to you (i.e., rental real estate or stock) and any gains you recognize when you sell that property. If you receive the gift of an inherited IRA from anyone other than your spouse, you must also withdraw and pay taxes on all the savings from that account within 10 years of the original owner’s death.
When you make a gift to another individual, a gift tax return may be required when the value of the gifted asset is higher than the annual gift tax exclusion, which is $18,000 per recipient in 2024 (or $36,000 per recipient for gifts made by married couples filing joint tax returns.) Gifts between spouses are not taxable, regardless of the gift’s value.
Also exempt from taxes are life insurance proceeds paid to a beneficiary after the policyholder’s death, as well as disability benefits you receive from a policy you own and for which you paid the premiums. Additionally, federal law provides a tax exemption for a portion of the capital gain you realize from selling a primary residence you lived in for at least two of the past five years. The exemption is limited to $250,000 for single taxpayers or $500,000 for married couples filing joint tax returns.
It is essential to regularly review your financial circumstances and your exposure to federal and state taxes to avoid any surprise liabilities you may owe to the government. Doing so will allow you the time to implement tax-efficient strategies before the federal tax filing deadline.
About the Author: Robert Mark Weiss, CFA, is a regional director and financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with PWA Securities, LLC. For more information, call (941) 308-1126 or email info@provweath.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., Nineteenth Floor Ft. Lauderdale, FL 33301Â (954) 712-8888.
Robert Mark Weiss is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Updated on April 26, 2024