Doing Your Own Taxes? Taxable and Nonetaxable Income

If you insist on doing your own taxes, then you will need to fully understand this announcement sent out by the IRS.  If you make a mistake and do NOT include certain income on your tax return, then you will more than likely end up with a paper audit, a CP 2000.  The IRS sends this notice out to taxpayers when they need to inquire about a deduction, expense or income not reported.

This is not meant to be a scare tactic.  If you read the article, you should be OK.  The bottom line, is you want to always avoid a CP-2000, because it will cost a lot more money to hire a tax professional to help you with a audit, (paper audit) then to do your taxes.

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Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

• Child support payments;
• Gifts, bequests and inheritances;
• Welfare benefits;
• Damage awards for physical injury or sickness;
• Cash rebates from a dealer or manufacturer for an item you buy; and
• Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

• Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

• Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering - the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.