The Difference Between Taxable Income vs. Nontaxable Income for Expats
Taxes do a lot for the American economy. The government uses your foreign income tax to invest in education and technology and provide services and goods for your fellow Americans. However, not all income is taxable. This article will discuss the difference between taxable vs nontaxable income, and which types of income are taxable and which are not.
Taxable Income Vs Nontaxable Income
What is Taxable Income?
Most types of income are taxable; these include earned and unearned income. Generally, taxable income is lower than your adjusted gross income (AGI) because you can apply exclusions and standard or itemized deductions. It doesn’t matter if you received taxable income in the form of electronic payment, cash, check, goods, or services; you will still have to pay for the tax.
You must understand which types of income are taxable so you would know what to report on your return. To help you out, here are the different types of taxable income, earned and unearned:
1. Alimony
If your divorce decree was finalized before 2019, you should include alimony in your income as the receiving spouse. For payer spouses, you can deduct alimony from your tax payments. However, due to the changes made in the Tax Cuts and Jobs Act of 2017, if your divorce decree was finalized in 2019 onwards, you don’t have to report alimony payments as income.
2. Barter income
This type of income isn’t easily identified, but you have to report it. You must include the income you received from the property or service you bartered on your tax return.
To do this, you must indicate the actual market value of the property or service you received during the bartering process. Barter income includes what you receive from selling or exchanging virtual currencies, like Bitcoin.
3. Salary bonus
Note that salary bonuses aren’t gifts. Therefore, considered taxable income. Your employer should include the amount of your salary bonus on your Form W-2 Wage and Tax Statement. You can exclude an employer bonus if it’s a noncash employee achievement award and the employer’s cost isn’t more than $1,600.
4. Gambling income
You need to report gambling winnings as income on your tax return. While this may be the case, you can still lower the taxes you need to pay by itemizing your deductions and subtracting gambling losses from your taxes.
5. Interest and dividends
Most interests and dividends are taxable, like interest or earnings generated from inherited cash. Unless the IRS specifically exempts a type of interest or dividend, you should consider it as taxable income.
6. Unemployment compensation
Government benefits like unemployment compensation are considered unearned income and are taxable. During the 2020 tax year, up to $10,200 of unemployment compensation is excluded from your income. However, for the 2021 tax year, unemployment benefits are back to being considered as federally taxable income.
What is Nontaxable Income?
As the name suggests, nontaxable income is the type of income that the IRS won’t tax you on. Hence, it would be best if you didn’t bother including them on your income tax return. Here are some examples of nontaxable income:
1. Child support
Most welfare benefits are nontaxable. This includes child support payments after a divorce. The payments foster parents receive to take care of children in homes also belong to nontaxable income.
2. Cash rebates
If you received cash rebates on items you purchased, whether it’s from a dealer, retailer, or manufacturer, you don’t have to declare them as income as they’re nontaxable.
3. Gifts and inheritances
Cash gifts or assets from employers, friends, and family are nontaxable. For received inheritance in 2022, it’s generally tax-free if it’s under $12.06 million. If the one who passed away has any taxes owed, their estate will pay for them.
4. Social security benefits
Whether or not your social security benefits are taxable will depend on how much you make on your other sources of income. If your income is above a certain level, up to 85% of your social security benefits are taxable. If you mostly rely on your social security benefits as a source of income, they may not be taxable.
5. Healthcare benefits
Some benefits that your employer provides may not be subject to tax, such as healthcare. Contributions to a long-term healthcare plan, employer contributions to a health spending account, and qualified reimbursements from these accounts are also tax-free.
Accurately File Your Income
By understanding the difference between taxable vs nontaxable income, you’ll be able to correctly file your tax return as an expat, avoid tax mistakes, and potentially pay fewer taxes. Beyond this list, there are more types of income you should be familiar with.
If you need help identifying if your sources of income are taxable or not, don’t hesitate to reach out to Tax Samaritan. We have been a provider of professional-quality tax resolution services to expats since 1997.