Individual Tax FAQs

1. Is all income subject to tax?

Income is subject to tax unless it is specifically exempted by law. Income subject to tax must be included on your tax return. Income that is not taxable may need to be shown on the tax return but is not taxable.

2. What types of income are not subject to income taxes?

Common forms of non-taxable income are: (a) life insurance proceeds, (b) gifts or Inheritances, ( c) insurance lawsuits is damages were a result of physical injury and (d) scholarships used by degree candidates for tuition, books, supplies and fees required for enrollment.

3. Which is better- A tax deduction or tax credit?

Both reduce your tax liability. A tax deduction reduces your taxable income thereby reducing your income tax. However, a tax credit is a dollar-for-dollar reduction of your income tax and can result in a refund even if you have no tax liability.

4. What is the difference between marginal and effective tax rates?

Marginal tax rate – The amount of additional tax paid for every additional dollar of earned income. Calculated as Total Tax/Total Income

Effective tax rate – The percent of income an individual pays in taxes. Calculated as Total Tax/Taxable Income

5. Should I itemize or claim standard deduction?

It depends which is larger. The IRS allows a standard deduction for each filing status. Compare the total amount of itemized deduction to your allowed standard deduction and use the larger of the two.

6. How does my 401k contribution affect my taxes?

401k contributions are typically a pre-tax deduction. The amount reduces the gross earned income to determine the taxable earnings. Lower taxable earnings reduces your tax liability.

7. When do I need to take a Required Minimum Distribution (RMD)?

You generally must start taking a withdrawal from your IRA, SEP IRA, SIMPLE IRA or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020)

8. Is there a penalty for early withdrawal from my 401k plan?

Yes. You must pay a 10% early withdrawal penalty unless an exception applies. This penalty is in addition to the tax paid on the income withdrawn.

9. Is unemployment income taxable?

Yes. You should receive a 1099-G with the income to include on your tax return.

10. Does purchase of electric vehicles help reduce my taxes?

New electric and fuel-cell vehicles will get a tax credit up to $7,500. Only vehicles that cost below a certain amount will qualify. For SUVs, pickup trucks and vans, the threshold is $80,000.

11. What is the maximum capital losses I can deduct on my tax return?

The maximum amount of capital losses allowed is $3,000 per year. Any unused losses can be carried forward to the next year.