When is income taxable, and when is it not?

You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.

Do you know the tax status of other types of income? Here's a quiz to test your knowledge.

1. You tell your son he'll be the sole beneficiary of your estate, and that you've decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he'll have to pay in taxes. What do you tell him?

Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.

2. You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you're not of retirement age. Do you have a taxable event?

Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it's not included in your income, and you can withdraw it penalty- and tax-free.

3. You purchase a piano at an auction and take it home. While cleaning it, you discover $5,000 inside. Is this money taxable to you?

Answer: Yes. Once it becomes yours, "treasure trove" property is taxable to you at fair market value.

The Coming Sunset Affects More Than Tax Rates

"The Coming Sunset Affects More Than Tax Rates"

Unless Congress acts soon, the "2001 Tax Act" will expire at the end of this year, bringing back pre-2001 tax rates and rules. While the current discussions focus on the income tax rates that will rise if the law is allowed to expire, there are dozens of other major changes that will sunset too.

Here's a quick overview of what 2011 will bring unless Congress intervenes.

* The limitation on itemized deductions based on income will be reinstated in full.

* The phase-out of the deduction for personal exemptions for higher-income taxpayers will be reinstated in full.

* Married couples filing a joint return will not be entitled to twice the standard deduction amount allowed for single taxpayers. Nor will couples get the 15% tax rate on twice the amount of income as single taxpayers get. The marriage penalty, in other words, is back to pre-2001 levels.
* The child tax credit and the dependent care credit will revert to pre-2001 levels.

* The maximum rate for capital gains will revert to 20%, and dividends will be taxed at ordinary income rates as high as 39.6%.

* Among the changes to education tax breaks, the annual contribution to Coverdell education savings accounts will revert to $500.

* The estate tax will return with a maximum rate of 55% and an exclusion amount of $1 million.

Your tax planning, as challenging as it already is, should take these potential changes into account. For guidance in your year-end planning, give us a call.

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About Jose F. Padro, P.A.

Padro and Company, P.A. CPA Doral, Miami Florida – Tax Services, Business Planning & Taxes, Bookkeeping and Accounting, IRS Audit and Dispute Representation, Personal & Business Taxes.
José F. Padró has over 25 years of public accounting experience having practiced is small, mid-size and large accounting firm environments. José has a broad range of experience in taxation, financial reporting and management consulting.

Trust the Professionals at PADRÓ & Company, P.A. Our professional staff is trained to understand the intricacies of business accounting and tax laws - and how to use them to benefit your bottom line.

Padro and Company, P.A. CPA Doral, Miami, Florida
2520 N.W. 97 Ave, Suite 120, Doral, FL 33172 –
(305) 500-9361 - Fax (305) 500-9492