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Tax Law: Taxable & Not Taxable Income

Tax law can be like playing monopoly if you don't know the rules

Avoiding the Season of Fear

Nothing strikes fear into the heart of americans like tax law. The reason is clear. Tax law is confusing. And the implications of misunderstanding or misapplying it can be severe. You’re not alone if you don’t understand tax law, especially as it relates to income. Einstein himself said the hardest thing to understand in the world is income taxes. Really? The E=MC squared guy didn’t get it? Doesn’t inspire a lot of confidence, huh? Your tax season has historically been frought with fear and anxiety. By empowering yourself with the tax law basics, April 15th will be just another day this year.

Current tax law provides that most types of “income” is taxable, but some is not. Income is not limited to money you receive. It can include property and services too. Examples are non-taxable income include:

  • Child support payments
  • Welfare benefits
  • Gifts, bequests and inheritance
  • Cash rebates from dealer or manufacturer for an item bought
  • Damage awards for injury or sickness
  • Reimbursements for qulified adoption expenses

Tax law provides that the following income is not taxable under certain conditions.

  • Schooling: Qualified scholarship income is usually not taxable.  Certain other costs, such as tuition and mandatory course books are also not taxable. Amounts used for room and board are taxable. 
  • Life Insurance Proceeds: Life insurance proceeds received because of an insured person’s death is typically not taxable. If you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

Special Tax Law Considerations

Tax law income considerationsAll income earned from an employer is taxable, unless tax law specifically excludes it. This includes wages, tips, salaries, commissions, and fees for personal services, in addition to other “non-cash” forms of compensation like stock options, fringe benefits and bartering. We’ve seen a lot of confusion over the years in our tax law practice concerning these and other special tax law considerations.

Stocks

Employee stock options can be popular and attractive – depending on the company offering that is. If you receive an option to buy or sell stock or other property as payment for services rendered, current tax law provides that you may have taxable income when you receive, exercise (buy or sell the stock), or otherwise dispose of the option. Tax law rules divide stocks into statutory and non-statutory which have other special timing and valuations considerations.

Fringe Benefits

There are very special and complex tax law rules concerning fringe benefits. Benefits received in connection with the performance of your services is considered taxable income, unless you pay the fair market value for it, or there is a specific exclusion. Abstaining from performing services, such as covenant not to compete, is treated as performance of services under current tax law rules.

Bartering

Bartering (or “this for that”) under tax law is an exchange of property or services. Both parties to a bartering transaction must include the fair market value of the goods or services received as income on their tax return.

 

 

About Dan Hanley

Specializing in estate planning, elder law and real estate law, Dan brings a wealth of experience and knowledge to help his clients with a variety of legal needs. In addition to a MBA and Juris Doctorate from Santa Clara University, Dan is also a licensed real estate broker since 1980.

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