Managing Money March with Our Bridges Resource Library
This month, we dive into MONEY! Once we have money, we need to know how to keep track of it. And, of course, we will need to file taxes. Join us for Managing Money March!
- March 5: Money Management Basics
- March 12: Background Information About Taxes
- March 19: Types of Income and Taxes on Earned Income
- March 26: Doing My Income Taxes
This week, we explore types of income and income taxes.
This Transition Tip is NOT Tax Advice!
Please note that no one should take anything in this article as tax advice. This article is SOLELY for information, and any tax needs should be taken to a professional in the field.
Bridges’ Support Always Available
Please remember that we at the Bridges Technical Assistance Center are eager to help you meet your money management – or other — needs.
Income
Income refers to money or goods. Income can result from employment, investments, or gifts/prizes.
Earned income
Earned income includes hourly wages, salaries, and independent contractor work. It includes all payments for work – whether made by check, cash, or another method (such as a gift card).
Net taxable self-employment earned income
Net income refers to the amount of self-employment earned income AFTER subtracting allowable expenses. These expenses can include many employment-related expenses, like transportation, office expenses and supplies, utilities, etc.
Unearned income
Gifts
Gifts are taxable – and this includes cash gifts, gift cards, physical items, and land. Luckily, Maryland does NOT impose a gift tax, and the federal gift tax limit is high.
We at the Bridges Technical Assistance Center often recommend that eligible individuals set up an ABLE account to receive gifts (check out the Benefits of ABLE Accounts Bridges Resource Library entry). This is still good advice: the annual ABLE account contribution limit equals the annual federal gift tax exclusion!
Prizes and winnings
Yes, even prizes and winnings from the lottery or other activities ARE taxable. Taxes on prizes and winnings will be owed both to Maryland and to the U.S. government.
Investment income
Typically, investment income comes from interest or dividends from investments (bank accounts, mutual funds, etc.). Note: Investment income can be either earned income or unearned income. Please contact a tax professional for more information.
Capital gains and losses (from sales)
Capital gains are the net proceeds from sales of tangible property (car, house, stocks, bonds, etc.). We calculate capital gains by taking the net amount of the sale (sales price minus costs of sale like commissions, advertisements, etc.) and subtracting the amount paid for the item (including costs of improvements, etc.). If that number is negative, it is a capital loss. While capital gains are taxable, not all capital losses are deductible.
The tax implications of capital gains and losses are far too complex for this short article. Please reach out to a tax professional for advice.
Rental income
Typically, people receive rental income from providing the use of their property (apartment, home, car, computer, etc.) to another for payment – rent. Rental income IS taxable. However, expenses related to maintaining the rental property can be deductible and reduce the taxable rental income. Note: Rental income can be either earned income or unearned income. Please contact a tax professional for more information.
Other Income
Disability Income – SSI and SSDI
SSI (Supplemental Security Income) provides monthly payments based on disability eligibility and financial need. SSI payments are NOT taxable income. SSI (Supplemental Security Income) – Fast Financial Facts Bridges Resource Library entry.
SSDI (Social Security Disability Insurance) also has disability and financial eligibility rules, but individuals receiving SSDI have higher earned income limits and no limits on unearned income SSDI (Social Security Disability Insurance) – Fast Financial Facts Bridges Resource Library entry. While SSDI benefits are not typically taxable, they can be taxed if other income is high enough. Please consult with a tax professional for more information.
ABLE Accounts
Income withdrawn from an ABLE account
So long as withdrawals from an ABLE account are spent on Qualified Disability Expenses (QDEs) for the account owner, those funds are NOT taxable. Find out more in our How Can ABLE Account Funds Be Spent? Bridges Resource Library entry.
Investment income and gains in an ABLE account
Maryland ABLE accounts provide four investment options. All investment income that occurs in an ABLE account is free from taxation.
Taxes Related to Earned Income
Payroll taxes
FICA (Social Security tax)
When we receive our paychecks, many of us find a large amount of our money has gone to “FICA.” FICA stands for “Federal Insurance Contributions Act,” and it funds Social Security retirement and disability benefits. FICA payments are required for all earned income. The total FICA rate is 12.4% of the first $160,200 of income. Employers pay half (6.2% ), and employees pay half. Self-employed individuals pay the entire amount. FICA taxes are not “income taxes” and are not refunded on the 1040.
Medicare tax
Medicare tax withholding mirrors that of FICA. The total Medicare tax rate is 2.9%, and it applies to all earned income.
Income taxes
Federal income tax withholding
Employers can take money out of a person’s paycheck and pay that money to the federal government on behalf of the worker. This is called withholding. Federal withholding is an estimate, and the employee will ultimately be responsible for paying all taxes owed (or will be entitled to a tax refund if too much money is withheld).
State tax withholding
Maryland imposes tax on its residents’ income. Employers usually withhold these taxes from paychecks, but the tax is owed even if it is not withheld.
Local tax withholding
All Maryland counties and Baltimore City levy an income tax. Like federal and state income taxes, these taxes are owed by the employee, but the employer may collect the taxes regularly from paychecks and pay it to the government for the employee.
Next Week
Join us next week as we dig into the nuts and bolts of calculating our income taxes.
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