Top 10 Income Tax Articles
Many people dread April 15th: the day taxes are due. However, careful tax planning may ensure that you are ready for your tax bill.
The Top 10 Income Tax Articles in the LegalMatch Law Library can help you successfully navigate this year’s taxes.
1. Income Tax
Let’s start with the basics. Most people know they have to pay income tax each year on the money they earn. However, the first thing people usually ask is, “What deductions can I take?” This article will help you figure out how much of your total income will actually be taxed.
An employer is in charge of withholding money for income tax from an employee’s wages. Seems straightforward right? This gets complicated when the taxpayer does not have a traditional employer/employee relationship with their employer. Instead, a taxpayer may be considered an independent contractor. In that case, he or she does not have taxes withheld from his or her wages.
Business-related deductions can greatly reduce taxable income because they are defined broadly. But if a taxpayer abuses this system, he or she may face large fines and even jail time. Get to know what is considered a “reasonable and helpful” business expense and how to calculate some of the common business deductions such as reasonable salaries, travel away from home, necessary rent, and education related to the business.
Come the end of the year, you will likely pay taxes to the state and other local government as well as the federal government. These state and other local taxes are deductible on your Federal income tax return. Also, some forms of interest are deductible. If you pay interest on certain loans, you may be able to deduct the interest from your income.
If you receive money from gambling, that is considered income and should be added to your total income before taking deductions. Legally, you must report this as income, even if it was made through illegal gambling. Additionally, if you have gambling losses, they can be deducted against any gambling gains. For example, if you lost $100 betting on horses and won $200 from a lottery you can offset each and will report $100 in income.
If you trade your car for someone else’s house, you have some taxable income because you gained the difference in the value of the house and the car. However, if you make a like-kind exchange you may not have to add any gain to your income. You also may receive a depreciable asset in exchange for a non-depreciable asset, which will change your tax scheme.
An assignment of income is when you decide that your wages will automatically be given to someone else rather than paid to you. Say you want to help out your parents, so you assign $500 a month to your parents. It may look like it is their income and you can deduct that amount, but it is actually still your income. Because you were the one who actually did the labor to earn the income and are in control of the assignment, you will have to count the money as part of your total income.
When a divorcing couple divides up assets and liabilities, those pieces of property have tax consequences attached to each. Two pieces of property that have equal monetary value may have entirely different tax structures. If one person receives a deduction because they received the house, while the other has to pay capital gains tax on stocks and bonds, they are not receiving truly equal pieces of property.
If the IRS thinks you haven’t paid your taxes properly, they may perform an audit. During an audit you will have to show that you properly prepared your taxes and will likely need the financial documents to back that up. While you don’t need to keep every receipt for the last 20 years, you do want to consider keeping documentation that was the basis for your income or deduction so you have it if the IRS comes to audit you.
Not filing taxes on income is called tax evasion and can lead to fines and possibly jail time. However, the IRS is more favorable to people who come forward on their own, as soon as they realize there is a problem. The IRS generally would rather set up some way to receive the back taxes and get you on your way to filing properly every year, than sending you to jail.