When individuals gets a bonus at work, win money through gambling or receive a small inheritance, the last thing they often think about is how the windfall will affect their taxes, if at all. Getting an unexpected cash influx can help people pay down debt, pad their retirement or plan a vacation, but before they spend all of their money, it's important to speak with a tax preparer about whether they need to set aside some of those funds for tax purposes. The rules can be hazy sometimes, because not all types of non-work related income is taxable.
For instance, beneficiaries of an inheritance are typically not required to pay federal income taxes on the assets and there is no federal inheritance tax in place. In addition, any estate taxes owed are paid by the decedent's estate, not the recipient of cash or property. However, if individuals inherit property or other income-producing assets, they may be required to pay taxes on these items. Additionally, some states may impose their own inheritance tax, the rules of which vary by location. It's important to keep in mind that while assets and cash may not be subject to federal tax, those who inherit an IRA or other retirement plan may face liabilities. It's important to speak with a professional before making any big decisions about how to manage a retirement account that has been passed down.
Certain types of benefits, such as disability benefits or compensatory damages received due to personal injury, are typically not taxable. However, it's always important to check with a provider, as rare scenarios may trigger a liability.
Types of income that are taxable
Millions of people participate in lottery drawings, games and races each year, and it's important to note that any proceeds earned from these activities are subject to taxes. Most casinos or gambling entities will send winners a 1099 Form during the year to outline their liability, but even if this does not occur, individuals are still required by federal law to report the income. However, individuals are also entitled to deduct gambling losses against that income, making it important to keep detailed records of all gambling transactions.
Many employees look forward to receiving a large bonus during mid-year reviews or the holiday months, but workers should know that these funds are taxable, as they are considered supplemental income. The same label is given to overtime pay, commissions, severance and pay for accumulated sick leave.
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