Our governments provide us with all sorts of goods and services, such as public transport and public education, which they pay for through taxes. If you earn money, you’re probably familiar with income tax.
Most incomes are taxable. That means whatever you earn, through whatever means, you have to pay a portion of that to the government. Whether you’re getting a salary from an office job or profit you’re earning from a business; you’ll have to pay a form of income tax.
However, there are also some kinds of income that are not taxable. It’s essential to know which incomes you need to pay tax on and which incomes are exempted so you can file your taxes correctly.
After all, you don’t want to end up overpaying, but you don’t want to end up in hot water with your local tax authorities either. So, here are ten types of taxable and nontaxable incomes.
5 Types Of Taxable Income
Besides your direct income, i.e., your salary, these incomes are also taxable:
1. Cash Income
If you earn your pay in cash through various off jobs, you still have to pay tax. It doesn’t matter that if you don’t have a fixed salary – as long as you’re earning, you must pay tax.
2. Interests and Dividends
Invested your money in some stocks? Any interest or dividends you receive will be taxed. However, some investments such as municipal bonds are not taxable! If you’re not receiving profit and just your investment back, you won’t need to pay tax.
3. Unemployment Benefits
Many people don’t realize that you must pay income tax on the unemployment benefits you receive.
If you receive alimony from an ex-spouse, you must pay income tax on it. However, if your divorce was finalized after 2019, your alimony payments are nontaxable.
5. Fringe Benefits
If you receive fringe benefits from your company, alongside your salary, they’re taxable. For example, if you receive benefits such as a free gym membership or a company car – it’s considered taxable income.
5 Types Of Nontaxable Income
1. Child Support
Even though alimony is taxable, if you receive any money for child support – it is nontaxable.
You don’t have to pay income tax on any gifts you receive.
There’s no income tax to be paid on inheritance either. This is because the person you’re inheriting from has already paid inheritance tax on your behalf.
4. Life Insurance
In general, when you receive a payout from a life insurance policy, it’s not taxable. However, if you cash a life insurance policy, you’ll have to pay tax on it.
5. Welfare Payments
While unemployment benefits are taxable income, any other welfare support you receive is nontaxable. For example, government payments to foster parents taking care of foster children are nontaxable.
So, there you have it. Here are ten types of taxable and nontaxable incomes. However, this list is not exhaustive. A little bit of research will show you many other types of taxable and nontaxable incomes.