In 2019, 50% of the revenue of the federal government came from individual income tax alone. That amounts to a whopping $1.7 trillion. That’s also on top of the $1.2 trillion generated by the Federal Insurance Contributions Act (FICA) tax.
All these make income tax the main source of the US government’s revenue. As such, income tax helps stabilize the economy and fund government activities.
Not all types of income are taxable though. There are even some states without income tax!
So the big question now is, what is taxable income and how does it differ from non-taxable income? How much income tax can you even expect to pay? What is considered income in the first place?
We’ll address all these burning questions below, so be sure to read on!
Income is the total amount of money that you receive in a month or within a year. Whereas wages or salaries are only a part of your monthly or yearly income. You can receive income in other forms, such as gifts, bonuses, and commission.
Remember: wages and salaries are compensation for work that you carry out. Some types of wages aren’t always taxable, but they will, once they become part of your income. Almost all salaries (fixed work pays) are taxable though.
Income, on the other hand, doesn’t always require work (again, such as if you receive it as a gift). So, even if you’re not doing any labor, you may still have to pay income tax.
What is Non-Taxable Income Then?
US taxpayers use around 20% of their gross yearly to pay for taxes, including income tax. On average, that equates to about $11,000 a year.
That’s a lot of money, and it’s possible that you don’t even have to pay that much. You’re likely faced with such high tax payments because you included non-taxable income.
That said, most types of income are taxable indeed, but there are some exemptions. These “exemptions” are what we call non-taxable income. Whether or not they appear on your tax return, you won’t have to pay income tax on them.
Examples of Income That Doesn’t Get Taxed
From inheritances to alimony payments, here are some non-taxable types of income:
40% of parents in the US plan to leave their offspring with an inheritance. If your folks are among these, that’s good news to you, as your inheritance isn’t taxable. If your inheritance is a type of real estate property though, you’re likely to pay property taxes on it once it’s in your name.
Alimony and Child Support Payments
Starting in 2019, income in the form of alimony payments have become non-taxable. Payors could no longer write them up as deductible or reportable items on their tax returns.
Child support payments are also non-taxable.
Employers shoulder the payments for over half of all health insurance policies in the US. The premiums they pay for on these policies are exempt from both federal income tax and payroll tax. If you’re paying a portion of the health policy, that should also be non-taxable.
Welfare payments include unemployment compensation, childcare aid, and health care funding. The federal and state governments extend these payments to the poor or disabled. As these people are already disadvantaged, the welfare payments they get are non-taxable.
Payout From a Life Insurance Policy
Life insurance payouts, also called “death benefits”, aren’t taxable. These are the payments that beneficiaries receive when the insured passes away.
What About Taxable Income?
Taxable income is any type of income subject to tax. Earned income is the most common type of income that gets taxed. Aside from wages and monthly salary, overtime pay, tips, and bonuses are also taxable.
How much of your income is taxable depends on how much your income is in the first place. The higher you are on the income bracket, the bigger the taxable portion of your income. For instance, if you (as a single taxpayer) make $518,401 or more every year, 37% of that is taxable.
Tax rates also vary based on who’s filing and paying. For instance, married taxpayers who file jointly will have a 10% tax rate on a combined income of up to $19,750. Whereas a head-of-the-household taxpayer will have a max tax rate of 10% on an income of up to $14,100.
Either way, you should always track your taxable income in order to make the right tax payments. Otherwise, failure to pay your taxes will incur penalties.
For instance, non-payment will result in a 5% penalty on your total unpaid tax. So, if you have an unpaid tax worth $5,000, you’d also pay $250 for the penalty, on top of that $5,000.
To stay on top of your tax payments, always keep your payslips and other receipts of payments. You may also want to use a check stub maker to create a copy or back-up of your pay stubs. All these will help you keep track of taxable salary, including overtime pays and bonuses.
What Other Types of Income Are Taxable?
Aside from your work salary, other taxable sources of income include the following:
Some Social Security Benefits
If your total individual income is $25,000 to $34,000 a year, half of your social security benefits may be taxable. If your total combined individual income is more than $34,000, then up to 85% of your benefits may also get taxed.
Dividends and interest payments you receive on your investments are often taxable. There are some exemptions though, so be sure to check with your investment advisor.
Gains From Asset Sales
Any earning or profit you make from selling an asset is also often taxable. Some examples are real estate and business machinery, or equipment sales.
Pay Your Taxes but Be Careful Not to Overpay
There you have it, the most important facts you need to know about taxable and non-taxable income. Now that you know how they differ, you can make sure that you’ll pay only the right amount of taxes. You’ll be doing your responsibility to the country, and at the same time, avoid IRS penalties.
Want to stay up-to-date of current events, within and outside of Missouri? Then be sure to save this site on your bookmarks bar so you can keep checking back for more of the latest news!