The Good Tax Guide » Tax Information

Tax on Life Insurance death benefit

Tax Guide — Sun, 01 Feb 2009 08:49:10 +0000

Under normal condition one does not have to pay any tax on life insurance death benefit. But it can be taxable if the amount paid exceeds a particular limit as mentioned in the rules. The amount will be included in the gross taxable income if the amount paid by the life insurance company is more than what they agree to pay at the time of death of the person. This can be explained in a better way with the help of an example. Suppose if the life insurance death benefit is $60,000 and if the company paid you $60,500 at the time of payment. Then the additional $500 paid will be taken as the taxable amount and should be included in the tax return form while filing it. If the amount paid is equal or less than the amount agreed then it will not be included in the taxable amount. Certain companies pay the life instalment benefits on instalment basis. So, if the money is received in the form of installments then you can remove that amount from the taxable part. But proper proof should be given. Also by dividing the amount received into payment in different years one can free it from tax.

Tax on Lump sum distribution

Tax Guide — Sat, 03 Jan 2009 08:44:37 +0000

Lump sum distribution refers to the large amount of money paid to the employee’s balance in a single tax year. In this case the payment is made according to the qualified plans of the person. The IRS has provided a different method for calculating the tax on lump sum distribution. It is called as the Special Averaging Method. The tax to be paid can be found out using this method. They have also provided a 10 year averaging tax option. It is given as special tax treatment and it is applicable if the person is born before 1936 only. In order to show the taxable lump sum distribution one should receive Form 1099-R from the person who employs you. So for filing the lump sum distribution makes sure that you receive this form so that the tax return can be filed appropriately without any delay. Delay in tax payment will result in penalties. There is also another option available other than the 10 year averaging tax plan. It is the IRA rollover. So make sure that you get the right benefits at the right time so that some amount of money can be saved. As everyone knows, money saved is money earned.

Is it necessary to pay tax on workers compensation?

Tax Guide — Wed, 10 Dec 2008 08:38:26 +0000

According to the workers compensation act one do not have to pay the tax on workers compensation which is received by the person who is given or by survivors for work related sickness. It is mentioned in workers compensation act. Also tax exemption is not applicable to the benefits given on the retirement plans. These benefits are given on the basis of age, service period or length, your contributions to the plan. This is applicable even if the cause of the retirement is injury or sickness related to occupation. In case if the payment is obtained from your employer then you have to include the obtained workers compensation in the taxable amount. Workers compensation may include social security benefits. The social security benefits included in the workers compensation is taxable and should be reported while filing the tax returns. Failure to report the social security benefits can lead to charges of penalties to you. In such a case one may have to pay more money as tax. So make sure that you enter all the income details before filing the tax form. The railroad benefit is also taxable and comes under the category of social benefits. So, it should be included in the taxable income.

Is it necessary to pay tax for household employees?

Tax Guide — Wed, 03 Dec 2008 08:38:21 +0000

If the amount paid to the household employee is $1,500 or more then one has to remit the IRS social society tax and Medicare tax, called as FICA. There will be another tax also known as FUTA. FUTA refers to Federal Unemployment tax which is to be paid to the IRS. This amount is to be paid if the employee does not work for any agency. FICA will not be applicable if the employee is your spouse or a child under the age of 21 years or if the wages are paid to the parents or if the household employee is under the age of 18 years. In case of FUTA tax, it is not applicable if the household employee is your spouse or a child under the age of 21 years. Also if the wages are paid to your parents then also the FUTA tax will not be applicable. The FUTA tax will be applicable if the amount of money paid to the household employee is 1,000$ or more. So if the salary exceeds the limit tax has to be paid for household employees, but if it remains within the limit then that amount will be exempted from taxes.

Is it necessary to pay tax on wages and salaries?

Tax Guide — Mon, 10 Nov 2008 08:20:59 +0000

Wages and salary belong to the taxable income. They are taxable because they are the payments received by the person for doing services for an employer. But there will be exemption in certain cases also. It include social security tax, Medicare tax, pensions, insurance and union dues. These things must be included in the gross taxable income on one’s tax return in that particular year. The items which are taxable income include commissions, royalties, salaries, tips, vacation pay, dismissal pay, sick pay, wages, back pay and bonuses. In case if the employer pays you social security tax and Medicare tax without making any tax deductions then they have to be included in the gross taxable income. All the wages and salaries obtained through all the means should be mentioned in the tax form. Failure to mention anyone may risk you to pay penalties. So before filing the tax form ensure that all the salaries or wages are properly mentioned in the form at appropriate places. In certain cases you may receive another tax form after filing the first original tax form. The new form sent has to be filled with the changes if any and should be filed.

Is it possible to get a tax extension from the IRS?

Tax Guide — Wed, 05 Nov 2008 08:19:11 +0000

Yes, it is possible to get a tax extension from the IRS. A six month automatic extension will be provided by them. This can be obtained if one files the extension tax form. It is filed for getting more time for the payment of tax. It is also useful in certain situations where you can escape from tax penalties due to the late payment. But here the problem is that once you file the extension tax form you will have to pay the interest when you make the tax payment on that year up to the date. Such a rule is made so that the person will pay the tax as early as possible for avoiding the further interest. The extension tax form should be sent to the IRS service centre. There is another option available for the person; he can pay the tax in instalments. The penalties of late payment can be avoided if the amount paid as tax equal about 90% of the total tax due. In this case the interest will be charged only on the unpaid amount left. In case of tax extension there are two separate rules. One rule is for the U.S citizens and the other one for the non residents.

Is it necessary to pay tax on mutual fund dividends and capital gains?

Tax Guide — Thu, 16 Oct 2008 08:11:54 +0000

All the dividends you receive from mutual funds should be reported on tax returns. In the case of a mutual fund the dividend will be paid in several ways. So the receiver must show the received dividend amount which is taxable in the tax returns. Failure in doing so will result in tax penalties for the person. According to the procedure of the mutual fund, they will send Form 1099-DIV to the receiver. The necessary instructions required for filling the tax form will be sent by the mutual fund itself. The dividends are to be entered into the Form 1040, Schedule B, line 5. In line 13 the mutual fund capital gains has to be entered. These are the long term gains distributed by the mutual funds. One must report the mutual fund capital gains made in the tax return form. But mutual fund non taxable distribution is not taxable as the name suggests. But it is non taxable only until the basis is reduced to zero. In case of any foreign tax, it will be mentioned in the Form 1099-DIV by the mutual fund. So, all dividends that one receive should be reported in the tax returns, nothing should be left out.

Is it possible to deduct an earned income credit on my tax return?

Tax Guide — Fri, 03 Oct 2008 02:48:25 +0000

The special credit applicable to the lower income workers who can deduct on their tax return is called as the earned income credit. In most of the cases this earned income credit can be claimed by worker people with certain number of children. But under special circumstances this facility can also be utilised by the people without children also. It can help you to reduce some amount of the tax you pay. By using this facility one can cop up with the increasing cost of living and social security tax. The most advantageous thing of the earned income credit is that it is directly deducted from the amount of tax you owe. So, more discounts can be obtained for the lower income workers. Also if you do not owe any tax also you may get some money back as it is a refundable credit. The tax form has clearly mentioned the requirements for getting the earned income credit. A person is not eligible for the earned income credit if he is getting an income greater than $2,800. It comes under the disqualified income category. Also one must have at least one child in order to get qualified for the earned income credit.

*This post was featured on Don’t Mess With Taxes

Is it necessary to pay tax on advance commissions?

Tax Guide — Mon, 29 Sep 2008 02:37:21 +0000

If a person receives advance commission then he must include the commission amount while calculating the tax. In other words it is a taxable income. In most of the cases, agents are given advance commissions even before the customer pays the premium amount. Such advance payments should be reported. If any repayment of advance commission is done then it should be reduced from the amount included in your tax if the amount is received on the same year. But if the amount is repaid on the next year then one can deduct the repayment on one’s tax return by including it as an itemized tax deduction. Some people adjust the payment so that they can get the maximum reduction while paying the tax. But there are some limits on it. If the amount exceeds $3,000 it will not be subjected to the 2% AGI floor. But if the advance payment amount is $3,000 or less then that amount will be subjected to 2%AGI floor. So by adjusting the amount one can make sure that the necessary deductions in tax are obtained. The details regarding the itemized tax deduction is given in the Form 1040, line 27 of schedule A in one’s tax return form. The good tax guide.

Is it possible to deduct Adoption Credit from Tax Returns?

Tax Guide — Sun, 28 Sep 2008 01:35:50 +0000

There is a limit put forward in the case of adoption credit. This limit is $10,960, which is allowed on one’s tax return. Also for a tax year the adoption credit must not be more than one’s tax liability. If there is any unused adoption credit present then, it may carry to the future tax returns up to 5 years. There are also certain expenses mentioned by them which will be taken into the category of adoption credit. It includes court costs, adoption fees, attorney’s fees, other miscellaneous expenses which are related to the adoption process. The adoption fee should be a reasonable one. They have also given the list which won’t be taken into account in the adoption credit. It includes the expenses that are given or reimbursed by a state or a federal, or the expenses associated with the adoption assistance program of the employee, expenses incurred in violation of the federal or state law, expenses incurred in doing a parenting arrangement. The most important thing is that the taxpayer must provide the IES name, age and TIN of the adopted child in order to qualify for the adoption credit. Also if the modified adjusted gross income exceeds $204,410 then no adoption credit will be given for the tax payer.