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What is taxable income?
Old 01-28-2005, 08:24 AM   #1
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What is taxable income?


There's not much the Internal Revenue Service doesn't consider taxable income. Of course, there are the standbys: salaries, wages, tips, commissions, interest and dividends, rent on property you lease out and all the money you make from that photography business on the side.

Bartering your services won't help, either. The value of noncash items must be determined and then counted as income. Neither can you put money in a foreign bank to earn interest out of Uncle Sam's reach. If it's in your name and you can get to it, it's considered income.

And don't think for a minute you can get away with some underhanded ways to make a few extra bucks. The IRS specifically says kickbacks and embezzlement proceeds are taxable, too.

The tax folks don't care if you steal it, as long as they get their piece of the action. Remember, it was the IRS that tripped up Al Capone.

Even trying to get a better grip on your finances could cost you at tax time.

Did you negotiate with a lender or other account holder to eliminate some of your debt? While you may no longer have a recurring payment, you'll probably now have to make one to the IRS. Any debt you owe that is canceled or forgiven (other than as a gift or a bequest) generally is considered income -- taxable income.

This tax rule could even apply when you pay off your home. If your lender offers a discount for the early payment of your mortgage and you take him up on it, the amount of the discount is canceled debt and you must include it in your income.

Then there are those minimal amounts you get when trying to do the right thing. Fulfill your civic duty as a juror and get a few bucks and you owe taxes on that pay. Serve as the administrator or executor of an estate and any stipend you get is taxable.

Efforts you made to reduce one year's tax bill also could come back to bite you if you get what the IRS terms recoveries. For example, your itemized deductions last year included medical expenses, mortgage interest and real estate taxes. This year, however, your insurance had a change of heart (or at least policy) and paid you back for some of those expensive tests. In an election-year frenzy, your county government rebated some of your past property tax payments. And your lender discovered that it had misapplied some of your payments as mortgage interest when the money really went toward your home's principal. The IRS requires you to include these amounts as income in the year you receive them up to the amount you previously claimed them as a deduction or credit.

Rewards for a job well done could cost you, too. If you get a bonus, it's income. Many fringe benefits, such as a company car or use of a health club, also are included in your income as compensation unless you pay fair market value for them or the law specifically excludes them. Your employer generally must withhold income tax on these benefits from your regular pay.

You can't get around taxes by claiming the company reward was a gift. The IRS will let it slide if your boss hands out a turkey, ham or nominally priced item at holiday time. But if you're given cash, a gift certificate or an item you can easily exchange for cash, you must include the gift's value as extra salary or wages regardless of the amount involved.

Heck, even if you're out of a job you're out of tax luck. Unemployment benefits are taxable.

Here are some more instances where the taxman wants his cut:

Alimony received
Awards, prizes, contest winnings and gambling proceeds
Back pay awards
Notary public fees
Patent, royalties, license receipts and any infringement compensation
Profit on sales between family members
Punitive damages
Residence sale profit above the exclusion limits
Severance pay
Strike benefits
In the tax clear
There are few sources of income that are not taxable. Unfortunately, many represent money you wish you didn't need to get in the first place. They are:

Black lung disease benefits
Disaster relief grants
Cash rebates from a dealer or manufacturer
Casualty insurance and other reimbursements
Child support payments
Compensatory damages awarded for physical injury or physical sickness
Damages for emotional distress due to a physical injury or physical sickness
Disability payments if you paid the premiums on the policy with already taxed dollars
Foster care payments when the care is for youngsters
Most moving expense reimbursement from your employer
Supplemental Security Income (SSI)
Veterans' benefits
Welfare benefits
Workers' compensation
And while an inheritance of property is not a taxable event, you'll owe Uncle Sam on any income the bequest produces.

As with almost every tax situation, it's not always clear-cut when it comes to taxable vs. nontaxable income.

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Re: What is taxable income?
Old 01-28-2005, 08:29 AM   #2
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Re: What is taxable income?

Heh! Or there is my favorite (almost) tax free source of cash: MLP distributions.
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Re: What is taxable income?
Old 01-28-2005, 09:48 AM   #3
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Re: What is taxable income?

Now you know why conservatives hate taxes.

Cheers,

Charlie
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Re: What is taxable income?
Old 01-28-2005, 09:55 AM   #4
 
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Re: What is taxable income?

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Now you know why conservatives hate taxes. *

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Yah sure! - Where are they going to get the money to pay for the record debt that they are running up?
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Re: What is taxable income?
Old 01-28-2005, 10:03 AM   #5
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Re: What is taxable income?

This is probably old hat to some, but the thing that burns me about tax on my salary is the 100% taxation, as if I have no basis in my time.

Buy a share of Microsoft for $30 and sell it for $31 and my taxable income is $1. Sell an hour of my time for $31 and my taxable income is $31.

Why does our tax system assume our time is worthless?

Ed
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Re: What is taxable income?
Old 01-28-2005, 10:33 AM   #6
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Re: What is taxable income?

Quote:
This is probably old hat to some, but the thing that burns me about tax on my salary is the 100% taxation, as if I have no basis in my time.

Buy a share of Microsoft for $30 and sell it for $31 and my taxable income is $1. *Sell an hour of my time for $31 and my taxable income is $31.

Why does our tax system assume our time is worthless?
So how much of a basis would you give yourself for your time and how would you justify it?
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Re: What is taxable income?
Old 01-28-2005, 02:48 PM   #7
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Re: What is taxable income?

Quote:
Sell an hour of my time for $31 and my taxable income is $31.
Ed- The best way to avoid this obvious inequity is to ER. That'll show 'um!
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Re: What is taxable income?
Old 01-28-2005, 04:14 PM   #8
 
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Re: What is taxable income?

Not sure if this was covered, but "forgiven debt"
is not taxable if the taxpayer can prove insolvency
at the time of the forgiveness. This is even true outside of bankruptcy as far as I know.

JG
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Re: What is taxable income?
Old 01-28-2005, 04:19 PM   #9
 
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Re: What is taxable income?

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Why does our tax system assume our time is worthless?
The answer to the question is - When I am enjoying myself to the fullest - It is worthless to everybody else.
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Re: What is taxable income?
Old 01-29-2005, 03:05 AM   #10
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Re: What is taxable income?

Quote:
This is probably old hat to some, but the thing that burns me about tax on my salary is the 100% taxation, as if I have no basis in my time.

Buy a share of Microsoft for $30 and sell it for $31 and my taxable income is $1. *Sell an hour of my time for $31 and my taxable income is $31.

Why does our tax system assume our time is worthless?

Ed
The $30 you paid for a share of Microsoft has already been taxed as income. The $31 for an hour of your time has not been taxed yet.
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Re: What is taxable income?
Old 01-29-2005, 04:48 AM   #11
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Re: What is taxable income?

Quote:
Not sure if this was covered, but "forgiven debt"
is not taxable if the taxpayer can prove insolvency
at the time of the forgiveness. This is even true outside of bankruptcy as far as I know.

JG
It's true, but the forgiven debt may nevertheless reduce basis in assets you have.
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Re: What is taxable income?
Old 01-29-2005, 04:54 AM   #12
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Re: What is taxable income?

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Heh! Or there is my favorite (almost) tax free source of cash: MLP distributions.

But isn't it true that the distributions are treated as return of capital? So your basis is reduced and you end up paying the tax when you sell?
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Re: What is taxable income?
Old 01-29-2005, 12:20 PM   #13
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Re: What is taxable income?

Quote:


But isn't it true that the distributions are treated as return of capital? *So your basis is reduced and you end up paying the tax when you sell?
That is certainly true, but I am quite happy to hold a quality MLP and take distributions because A) it is likely to be a loooong time before I sell (time value of money) and B) when I do sell, it is highly likely that I will be matching up gains and losses. IOW, the tax man may never get his "due". In the mean time, I am happy with the cash flow.
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Re: What is taxable income?
Old 01-29-2005, 12:50 PM   #14
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Re: What is taxable income?

Figuring basis in time is easy, and I can prove it.

When I sell time to my employer I carry certain costs. Under the current tax code they are non-deductible against my salary.

-The cost of my education
-Depreciation on the suit I'm wearing
-The cost of the commute
-Meals consumed while working
-Gym membership (gotta stay healthy so I can work)
-Rum & Rolaids

I could go on and on with this, but you see the point. If I were a business selling my services I could net all this stuff out above the taxable income line, but as an individual I can't.

On the metaphysical side, I could say that every hour is a pearl beyond price, but auditors would be coming after me with butterfly nets. Maybe they should.

Ed
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Re: What is taxable income?
Old 01-29-2005, 01:08 PM   #15
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Re: What is taxable income?

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Figuring basis in time is easy, and I can prove it. *

When I sell time to my employer I carry certain costs. *Under the current tax code they are non-deductible against my salary.

-The cost of my education
-Depreciation on the suit I'm wearing
-The cost of the commute
-Meals consumed while working
-Gym membership (gotta stay healthy so I can work)
-Rum & Rolaids

I could go on and on with this, but you see the point. *If I were a business selling my services I could net all this stuff out above the taxable income line, but as an individual I can't.
If you think you deduct all the items you list above if you had your own business, you better find yourself a good CPA.
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Re: What is taxable income?
Old 01-29-2005, 01:28 PM   #16
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Re: What is taxable income?

Our hypothetical corporate CPA wouldn't be worth his salt if he couldn't get deductions for this stuff. I picked those things because they're the individual's equivalents of standard corporate line items:

-Training
-Employee uniforms
-Transportation
-Employee meals on business travel
-Employee wellness

All of these come out before the EBIT line.

Look, the point I'm trying to make is that I think salary should be treated more like a gross income than a net. Our tax code doesn't recognize that. Why not?

"Taxable income" should be what nets after costs of doing business. Period.

Ed
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Re: What is taxable income?
Old 01-29-2005, 02:18 PM   #17
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Re: What is taxable income?

Quote:
Our hypothetical corporate CPA wouldn't be worth his salt if he couldn't get deductions for this stuff. *I picked those things because they're the individual's equivalents of standard corporate line items:

-Training
-Employee uniforms
-Transportation
-Employee meals on business travel
-Employee wellness

All of these come out before the EBIT line.

Look, the point I'm trying to make is that I think salary should be treated more like a gross income than a net. *Our tax code doesn't recognize that. *Why not?

"Taxable income" should be what nets after costs of doing business. *Period.
The first list is all personal expenses. This second list is business expenses. If you gave me this second list first, I would have told you you could take them as employee business expenses.

Our tax code DOES recognize wages as a gross from which you may deduct a personal exemption and a standard deduction or itemized deductions, get a deduction or tax credit for tuition, etc, before being taxed on an amount smaller than your original gross income. People can earn thousands of gross dollars before they are hit with any federal income tax.
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Re: What is taxable income?
Old 01-29-2005, 02:59 PM   #18
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Re: What is taxable income?

Why should personal expenses be different from business expenses when the individual's engaged in the business of selling her time?

Sure, an individual can itemize, but the rules are based on social policy instead of GAAP. I don't get that. Here's an example. Individual tuition deductions phase out. Corporate training budgets don't. What's the difference?

(We should be having this conversation over a beer.)

Ed
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Re: What is taxable income?
Old 01-29-2005, 03:07 PM   #19
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Re: What is taxable income?

Ahh... now you know the built-in bias in the tax code against wage earners. My best guess on the answer to why the IRS treats wage earners differently from businesses? 'Because they can". Or put another way, now you know why I think it is such a dandy idea to self-incorporate, (LLC, Sole Proprietorship, S-Corp, whatever) in ER if you have any intention to do part-time work. Then, Ed, you would be able to truly look at yourself as a business, selling time and deducting (much of) the basis.
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Re: What is taxable income?
Old 01-29-2005, 03:34 PM   #20
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Re: What is taxable income?

Quote:
Sure, an individual can itemize, but the rules are based on social policy instead of GAAP. *I don't get that. *Here's an example. *Individual tuition deductions phase out. *Corporate training budgets don't. *What's the difference?

(We should be having this conversation over a beer.)
I think you answered your own question. Tax policy is a tool to bring in revenue and to direct society as the Congress critters see fit. The reason mortgage interest is deductible while credit card interest is not is because the government wants to promote home ownership but does not want to encourage people to max out their credit cards.

By the way, if this were a business meeting, the cost of the beer would be deductible
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