Difference between revisions of "User:Fyre4ce/Income tax"

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| Alimony received || ??? || Generally unreported || Alimony received from an agreement entered into on or before December 31, 2018 is taxable to the recipient and tax-deductible to the payer. Alimony received from an agreement entered into ''after'' December 31, 2018 is tax-free to the recipient and non-deductible to the payer.  
 
| Alimony received || ??? || Generally unreported || Alimony received from an agreement entered into on or before December 31, 2018 is taxable to the recipient and tax-deductible to the payer. Alimony received from an agreement entered into ''after'' December 31, 2018 is tax-free to the recipient and non-deductible to the payer.  
 
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| Annuity distributions || ??? || ??? || Distributions from an annuity purchased after-tax are partly taxable until the principal has been fully returned, and fully taxable thereafter. The taxable amount of annuity payments is calculated in the [https://www.irs.gov/pub/irs-pdf/i1040gi.pdf Form 1040 Instructions] Simplified Method Worksheet. The annuity principal return is spread over between 120 and 360 months, depending on the taxpayer's age.
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| Annuity distributions || [https://www.irs.gov/pub/irs-pdf/f1099r.pdf Form 1099-R] || Form 1040 lines 4a and 4b || Annuitized distributions from a non-qualified annuity are partly taxable until the principal has been fully returned, and fully taxable thereafter. The taxable amount of annuity payments is calculated in the [https://www.irs.gov/pub/irs-pdf/i1040gi.pdf Form 1040 Instructions] Simplified Method Worksheet. The annuity principal return is spread over between 120 and 360 months, depending on the taxpayer's age. For systematic or periodic withdrawals from an annuity purchased after-tax, distributions are taxed on an interest first, principal last basis.
 
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Revision as of 22:34, 17 February 2020

Flag of the United States.svg.png This page contains details specific to United States (US) investors. It may not apply to non-US investors.

Income tax in the United States is a complex and often-misunderstood topic. While the entire US tax code is far too complex to be described in a single wiki article, this page walks readers through the major parts of income tax calculations, and lists the most common types of income, deductions, and credits that will apply to the vast majority of readers. IRS Form 1040 forms the main structure by which income taxes are calculated. Where appropriate, this article will list the lines on Form 1040 related to each section, along with other relevant IRS forms.

Taxable Income

Generally, the IRS taxes all forms of income unless specifically excluded by law, although numerous forms of tax-free income exist. IRS Publication 525 describes the tax treatment of various kinds of incomes. The most common forms are described here.

Fully taxed income

The following types of income are generally fully taxed, and are reported on Form 1040 lines 1-7:

Fully taxable income
Type of income How reported to taxpayer How appears on tax return Comments
Employment income Form W-2, box 1 Form 1040 line 1 Tax-deductible contributions (401(k), 403(b), etc.) and pre-tax deductions (health insurance premiums, HSA contributions, etc.) are typically excluded from W-2 box 1
Other taxable employment compensation (vacation/sick pay, bonuses/awards, severance pay, Restricted Stock Unit (RSU) grants, etc.) Form W-2, box 1 Form 1040 line 1 Self-employed health insurance premiums are included in W-2 box 1, and are deducted on Form 1040 Schedule 1 line 16
Taxable interest Form 1099-INT Form 1040 line 2b
Non-qualified dividends Form 1099-DIV Form 1040 line 3b
Short-term capital gains Generally Form 1099-B or unreported Form 1040 Schedule D and Form 1040 line 6
Sale of business property held <=1 year Generally unreported Form 4797 and Form 1040 Schedule 1 line 4
Net business income from self-employment (an activity performed regularly and for profit) Varies, but often Form 1099-MISC and sometimes not reported Form 1040 Schedule C and Form 1040 Schedule 1 line 3 Taxable business income (revenue minus expenses) has one-half of the self-employment tax subtracted.
Qualified plan distributions Form 1099-R Form 1040 lines 4c and 4d Generally, distributions from pre-tax plans such as 401(k)'s, 403(b)'s, 457(b)'s etc, including Roth conversions, are fully taxable.
Rental property income Generally unreported Form 1040 Schedule E and Form 1040 Schedule 1 line 5 Unless the taxpayer is a real estate professional, rental property losses are subject to Passive Activity Loss Limitations
State unemployment benefits Form 1099-G Form 1040 Schedule 1 line 7
Royalties Form 1099-MISC Form 1040 Schedule E and Form 1040 Schedule 1 line 5
Partnership income (pass-thru) Schedule K-1 (Form 1065) Form 1040 Schedule 1 line 5
S-corporation income (pass-thru) Schedule K-1 (Form 1120S) Form 1040 Schedule 1 line 5
Gambling winnings Form W-2G line 1 Form 1040 Schedule 1 line 8
Goods or services received through barter Generally Form 1099-B Form 1040 Schedule C and Form 1040 Schedule 1 line 3 Generally, the Fair Market Value (FMV) of all goods and services received through barter transactions are reportable as income, and the value of goods or services given are not deductible against this value. This applies to each party in the exchange.
Other income, including hobby income (not from an activity done regularly and for purpose of profit), game show winnings and other awards, found property, canceled debts, jury duty pay, etc. Form 1099-MISC or unreported Form 1040 Schedule 1 line 8

Tax-free income

The following forms of income are generally tax-free to the taxpayer who receives them:

Tax-free income
Type of income How reported to taxpayer How appears on tax return Comments
De minimis benefits Generally unreported Generally unreported Non-cash benefits from an employer to an employee that quality as "de minimis" benefits, which the IRS considers unduly burdensome to account for, are generally not taxable as income. See IRS Publication 5137.
Tax-free interest 1099-INT line 8 or 1099-DIV line 11 Form 1040 line 2a Generally, interest from state and local government obligations (municipal bonds, etc.) is exempt from federal income taxes
Roth IRA distributions 1099-R or unreported Generally not reported Roth plan distributions are tax-free and do not appear on Form 1040, unless certain exceptions apply (non-qualified distribution before age 59½, distributions of gains for account held for less than 5 years, etc.)
Gifts Generally unreported Generally unreported Gifts are generally taxable to the giver and tax-free to the receiver. Gifts to an individual in excess of the annual gift exclusion ($15,000 in 2020) require the filing of Form 709 as part of the giver's tax return, except for gifts made directly to an educational or medical institution.
Worker's compensation and state disability benefits ??? Generally unreported
Life insurance proceeds ??? Generally unreported Life insurance proceeds are generally tax-free if the policy was purchased after-tax
Welfare or other public assistance ??? Generally unreported
Cash rebates Generally unreported Generally unreported Rebates received on condition of purchase are generally tax-free, including credit card rewards

Partially taxed income/special tax treatment

The following forms of income have a special tax treatment, and are either partially taxable and/or taxable at a rate different from ordinary income:

Tax-free income
Type of income How reported to taxpayer How appears on tax return Comments
Qualified dividends Form 1099-DIV box 1b Form 1040 lines 3a and 3b Qualified dividends are included in Form 1040 line 3b (ordinary dividends) and fully count as part of Adjusted Gross Income. However, qualified dividends are taxed at a reduced rate, and this calculation is performed further down on the tax return, see "Tax due".
Long-term capital gains Generally Form 1099-B or unreported Form 1040 Schedule D and Form 1040 line 6 Long-term capital gains are included in Form 1040 line 6 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see "Tax due".
Sale of business property held >1 year Generally unreported Form 4797 and Form 1040 Schedule 1 line 4 Long-term gains on business property are included in Form 1040 Schedule 1 line 4 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see "Tax due".
Traditional IRA distributions Form 1099-R Form 1040 lines 4a and 4b Distributions from a Traditional IRA, including Roth conversions, are taxable according to the "pro-rata" rule. The taxable portion of an IRA distribution is calculated on Form 8606.
Social Security benefits Form SSA-1099 Form 1040 lines 5a and 5b The taxable portion of Social Security payments depends on the amount of the payment and amounts of other income (including tax-free interest), and can be anywhere between 0% and 85% of the benefit. The taxable amount is calculated in the Form 1040 Instructions Social Security Benefits Worksheet.
Disability insurance proceeds Form W-2, box 1 Form 1040 line 1 Generally, disability insurance proceeds from insurance purchased pre-tax are taxable, where proceeds from after-tax insurance are tax-free. For proceeds from insurance paid for by both an employer and employee, the proceeds must be proportioned between pre-tax and after-tax premiums.
State tax refund Form 1099-G Form 1040 Schedule 1 line 1 Generally, state tax refunds from prior years are taxable if the overpayment in the prior year decreased the taxpayer's tax liability, and tax-free otherwise. The taxable amount is calculated in the Form 1040 Instructions State and Local Income Tax Refund Worksheet.
Alimony received ??? Generally unreported Alimony received from an agreement entered into on or before December 31, 2018 is taxable to the recipient and tax-deductible to the payer. Alimony received from an agreement entered into after December 31, 2018 is tax-free to the recipient and non-deductible to the payer.
Annuity distributions Form 1099-R Form 1040 lines 4a and 4b Annuitized distributions from a non-qualified annuity are partly taxable until the principal has been fully returned, and fully taxable thereafter. The taxable amount of annuity payments is calculated in the Form 1040 Instructions Simplified Method Worksheet. The annuity principal return is spread over between 120 and 360 months, depending on the taxpayer's age. For systematic or periodic withdrawals from an annuity purchased after-tax, distributions are taxed on an interest first, principal last basis.

Above-the-line deductions

Adjusted Gross Income (AGI)

Below-the-line deductions

Section 199A deduction

Tax credits

Penalties and other taxes

Total tax due

Total prior payments

Refund or tax due