Most everyone knows their official tax bracket, or the percentage they must pay on ordinary, earned income when filing time arrives each April. But, what about some of the non-ordinary kinds of money that come into your life? This category can include things like Social Security payments, proceeds from selling a life insurance policy, bartering proceeds, book royalties, or cash you find in the street. Tax laws can be tricky and confusing at best. Check the following five situations to see whether you are up to date on how much, if any, tax you might have to pay if you receive them.
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Social Security Income
At one time in the not-too-distant past, social security benefits recipients paid no tax on the money at all. Nowadays, the IRS uses a complex formula based on your other earnings, amount of social security, and a few other factors to determine how much you need to pay in taxes. The good news is that unless you are very well off, the vast majority of your social security payments will not be taxed at all.
Life Insurance Settlements
Millions of working and retired adults sell their life insurance policies for cash. The reasons vary, but the big question is settlement money tax-free? The answer is yes and no. The first step you should take if you intend to sell a policy is to review a comprehensive guide on life settlement taxation rules. Be sure to do so before you sign on the dotted line and make the deal official. People do not have to pay any tax on whatever their cost basis is in the policy. They pay the ordinary rate on any amount received above cost basis but less than the cash surrender value. Finally, they have to pay capital gains rates on whatever amount of the life settlement is above the cash surrender value.
If you wrote a book or published anything from which you received royalty payments, the rule is simple in that the money is taxed at ordinary earnings rates. So, if your W-2 wages from a regular job amount to $40,000 and you received $2,000 in royalties, then your total income would be $42,000.
Tax attorneys and CPAs are often asked the question on what to pay taxes on and this would fall into that category of top taxable questions with lesser-known answers. What if you find a $100 bill in the street and keep it, after looking for the rightful owner, of course? Legally, the money is yours if you found it in a public space. For taxation purposes, it’s ordinary income and you can simply add it to your regular wages and any other earnings you had for the year. It seems fanciful and humorous, but people often find large sums of discarded money in unexpected places, and they are legally obligated to report it on their annual returns. Whether they do or not is another question.
One of the most misunderstood points of taxation law is related to bartering, a transaction in which people trade services and goods. Say you agree to mow your neighbor’s lawn and instead of cash, he gives you a brand-new toaster oven he received as a gift, but didn’t need. You need to report an amount on your return to reflect the fair market value of the toaster oven.