An asset is any resource with economic value that is expected to provide a future benefit to its holder. An asset may be differentiated from income by this distinction: income is money that is being received, whereas an asset is something—typically money or property—that a person is already in possession of. The Internal Revenue Service (IRS) considers most types of income taxable. There are few exceptions to this; any income that is not taxable, or tax-exempt, is clearly delineated in the Internal Revenue Code (IRC).
Key Takeaways
- An asset is any resource with economic value that is expected to provide a future benefit to its holder.
- Income is money that is being received, while an asset is money or property that a person is already in possession of.
- The Internal Revenue Service (IRS) considers most types of income taxable; any income that is not taxable, or tax-exempt, is clearly delineated in the Internal Revenue Code (IRC).
- Many taxpayers use financial planning strategies that can lower their overall income tax liability.
Taxable Income vs. Tax-Exempt Income
Taxable income includes wages, salaries, bonuses, and tips, as well as unearnedincome. Unearned income is any income received from investments and other sources unrelated to employment. Examples include interest from savings accounts, bond interest, alimony,and dividends from stock.
In some situations, tax refunds that taxpayers are eligible for may be counted as taxable income. However, this is typically only the case if a taxpayer claimed a deduction for state and local taxes in the prior tax year. If that is the case, a taxpayer may be required to report any tax refunds on line 1 of Schedule A of Form 1040. This rule is in place to prevent taxpayers from claiming a deduction for their state income taxes and then, later, also receiving a tax-free refund.
Of those items that the IRC delineates as not taxable (or tax-exempt), inheritances, child support payments, welfare payments, manufacturer rebates, and adoption expense reimbursem*nts are generally not taxed.
Gains in tax-deferred accounts are protected from taxation under specific conditions, although they may be taxed at a later date (as opposed to annually like other sources of income). Tax-deferred accounts are savings accounts that typically do not require taxpayers to claim the income earned by the account (but not withdrawn) on their annual tax return.
Some examples of tax-deferred accounts include individual retirement accounts (IRAs), employer-sponsored retirement plans (such as 401(k), 457 or 403(b) plans), and tax-deferred annuities.
Gains in tax-deferred accounts may be taxed if special conditions are violated (such as an early withdrawal of the monies or illegal usage of the funds in the account).
Financial Planning Strategies That Reduce Taxable Income
Some taxpayers use investment strategies that reduce their total tax liability. A tax-minimization strategy may take advantage of various investments that get different tax treatments. In particular, a financial planning and investment strategy that aims to reduce taxes may maximize the use of tax-deferred accounts.
However, investors using an investment strategy that aims to reduce taxable income tend to hold some of their investments in taxable accounts. For this strategy, it's typically recommended that tax-friendly stocks, volatile stocks, and index funds are held in taxable accounts, whereas taxable bonds, real estate investment trusts (REITs), and mutual funds should be held in tax-deferred accounts.
Take Advantage of Deductions and Credits to Reduce Taxable Income
Other legal ways of reducing your taxable assets are to take advantage of all available tax deductions and tax credits. A tax deduction reduces the income you're taxed on, while a tax credit actually cuts your tax bill directly.
That is, with a tax deduction, a taxpayer can subtract the amount of the tax deduction from their income, thus making their taxable income lower: the lower your taxable income, the lower your tax bill. On the other hand, a tax credit is a dollar-for-dollar reduction in your actual tax bill.
There are two options for claiming a tax deduction. You can either claim the standard deduction or itemize your deductions. Choosing to itemize deductions or opt for the standard deduction will impact a taxpayer's total liability, so it is worthwhile to compare tax liability under both options if you're uncertain.
The standard deduction lowers your taxable income by a fixed amount. If the standard deduction that a taxpayer qualifies for (based on their age, income, and filing status) is greater than the sum of the itemized deductions they qualify for, they are better off taking the standard deduction.
For taxpayers who elect to itemize deductions, the goal is also to reduce their taxable income. Some common itemized deductions include unreimbursed medical and dental expenses, interest expenses, and charitable donations.
Tax credits can further reduce your liability. Sometimes tax credits even result in a refund for the taxpayer. Some of the most common tax credits that taxpayers are eligible for include the American Opportunity Tax Credit (AOTC), Child Tax Credit, Adoption Credit, and the Lifetime Learning Credit.
FAQs
Of those items that the IRC delineates as not taxable (or tax-exempt), inheritances, child support payments, welfare payments, manufacturer rebates, and adoption expense reimbursem*nts are generally not taxed.
What are 3 items that are not taxable? ›
Inheritances, gifts, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, welfare payments, and money that is reimbursed from qualifying adoptions are deemed nontaxable by the IRS.
What assets are considered income? ›
Earning assets are income-producing investments that are owned, or held, by a business, institution, or individual. Earning assets include stocks, bonds, rental property income, CDs, and other interest or dividend-earning accounts.
What is not considered an asset? ›
Business assets include money in the bank, equipment, inventory, accounts receivable and other sums that are owed to the company. Hence, a building that has been taken on rent by the business for its use would not be regarded as an assets because company have no ownership of that building.
What is taxable and non taxable income? ›
Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable.
Are stocks taxable assets? ›
If you sell stocks for a profit, you'll likely have to pay capital gains taxes. Generally, any profit you make on the sale of a stock is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less.
Are personal assets taxed? ›
Personal property, which refers to assets that are movable, is taxed in several states and localities in the United States and can be quite complicated as each jurisdiction has its own rules on what constitutes personal property and how it's taxed and collected.
Are business assets taxable? ›
Generally speaking, sales of assets such as equipment, buildings, vehicles and furniture will be taxed at ordinary income tax rates, while intangible assets such as goodwill or intellectual property will be taxed at capital gains rates.
What items do not get taxed? ›
Some items are exempt from sales and use tax, including:
- Sales of certain food products for human consumption (many groceries)
- Sales to the U.S. Government.
- Sales of prescription medicine and certain medical devices.
- Sales of items paid for with food stamps.
Some situations where you receive money and will not have to pay taxes may include disability insurance payments, health savings accounts (HSAs), employer-provided insurance, life insurance payouts, financial gifts, and inheritances.
Income excluded from the IRS's calculation of your income tax includes life insurance death benefit proceeds, child support, welfare, and municipal bond income. The exclusion rule is generally, if your "income" cannot be used as or to acquire food or shelter, it's not taxable.
Is cash a taxable asset? ›
While cash flow is not taxed, it can impact taxable income. For example, a business with a positive cash flow can invest in assets or pay off debts, reducing taxable income.
What qualifies for assets? ›
An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.
Do retirement accounts count as assets? ›
Your 401(k), and any other retirement accounts, are financial assets. These are portfolios in which you hold securities and investment products that have either realized or potential value. This makes your 401(k) portfolio an asset in your name as long as you own the account and as long as it has a positive balance.
Does my checking account count as an asset? ›
Assets are things you own that have value. Your money in a savings or checking account is an asset. A car, home, business inventory, and land are also assets.
Is my bank account considered an asset? ›
Since an asset is cash or something that can be converted to cash, a checking account is considered an asset as long as it has a positive value. If your checking account is overdrawn, you owe your bank or credit union money, which makes it a liability.
What is not counted as income? ›
Earned income also includes net earnings from self-employment. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits.
Which of these examples is taxable income? ›
Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.
What percentage is deducted for Social Security and Medicare? ›
NOTE: The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings.
How do I avoid capital gains tax? ›
9 Ways to Avoid Capital Gains Taxes on Stocks
- Invest for the Long Term. ...
- Contribute to Your Retirement Accounts. ...
- Pick Your Cost Basis. ...
- Lower Your Tax Bracket. ...
- Harvest Losses to Offset Gains. ...
- Move to a Tax-Friendly State. ...
- Donate Stock to Charity. ...
- Invest in an Opportunity Zone.
The statutory threshold amounts are: Married filing jointly — $250,000, Married filing separately — $125,000, Single or head of household — $200,000, or.
Is a personal car a capital asset? ›
Capital assets are significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art.
Are personal possessions considered assets? ›
Personal property is also known as movable property, movables, and chattels. Because it is viewed as an asset, it may be taken into consideration by a lender when someone applies for a mortgage or other loan.
Which state has highest taxes? ›
Highest tax burdens
- New York - 12.47%
- Hawaii - 12.31%
- Maine - 11.14%
- Vermont - 10.28%
- Connecticut - 9.83%
- New Jersey - 9.76%
- Maryland - 9.44%
- Minnesota - 9.41%
Simply put, assets are stuff that your business owns. From vehicles to tools, computers to pens and paper, the things that help you work are assets. Buildings and land are assets too, but even if you rent, chances are you have assets of some kind. Even the software you use on your business computer is an asset.
Which investment accounts are tax free? ›
Traditional IRA/Roth IRA: Tax-free growth with income and contribution limits. Traditional IRAs use pre-tax money while Roth IRAs use after-tax money, offering tax-free withdrawals in retirement. Health Savings Account (HSA): Tax-deferred and tax-free earnings on eligible medical expenses.
What assets Cannot be depreciated in business? ›
What Can't You Depreciate?
- Land.
- Collectibles like art, coins, or memorabilia.
- Investments like stocks and bonds.
- Buildings that you aren't actively renting for income.
- Personal property, which includes clothing, and your personal residence and car.
- Any property placed in service and used for less than one year.
The three biggest categories of expenditures are: Major health programs, such as Medicare and Medicaid. Social security. Defense and security.
Is life insurance taxable? ›
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.
What products are most taxed? ›
Five categories of excise taxes—highway, aviation, tobacco, alcohol, and health—accounted for 93 percent of total excise tax receipts in 2019 (figure 2).
In order to convict you of a tax crime, the IRS does not have to prove the exact amount you owe. But such charges most often come after the agency conducts an audit of your income and financial situation. Sometimes they're filed after a tax collector detects evasion or fraud.
What are the 4 categories of taxable items? ›
There are many different kinds of taxes, most of which fall into a few basic categories: taxes on income, taxes on property, and taxes on goods and services.
Does selling assets count as income? ›
The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.
Is cash on hand considered an asset? ›
Liquid assets are the most basic type of asset, used by consumers and businesses alike. Cash on hand is considered a liquid asset due to its ability to be readily accessed. Cash is legal tender that a company can use to settle its current liabilities.
Is cash on hand included in assets? ›
In short, yes—cash is a current asset and is the first line-item on a company's balance sheet. Cash is the most liquid type of asset and can be used to easily purchase other assets.
Is your car an asset? ›
In accounting terms, your car is a depreciating asset. This means your vehicle may have value right now and you could sell it. However, while you own the car, that value usually goes down over time.
What are the 3 types of assets? ›
- Based on convertibility (current assets and non current assets)
- Based on physical existence (tangible and intangible assets)
- Based on usage (Operating and non-operating assets)
If it holds value and could be used to offset your liabilities, it's an asset. Liabilities are debts. Loans, mortgages and credit card balances all fit into this category.
Does Social Security count as an asset? ›
And yes, Social Security is a fixed-income asset. So it's more bond-like than stock-like. But it's definitely not a bond.
Is it better to have assets or cash? ›
The concept of saving is smart, but investments in assets is smarter. To know why savings can set you back in the long run, read full article here. Holding or saving cash in the long run, can prove to be a liability, since the saving accounts and the low interest rates are not adjusted for inflation.
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.
Where can I put money to avoid taxes? ›
There are a few methods that you can use to reduce your taxable income. These include contributing to an employee contribution plan, such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.
Are there investments that aren't taxed? ›
Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds. And you can save even more if you live in a state that offers similar exemptions.
Which investment accounts are tax-free? ›
Traditional IRA/Roth IRA: Tax-free growth with income and contribution limits. Traditional IRAs use pre-tax money while Roth IRAs use after-tax money, offering tax-free withdrawals in retirement. Health Savings Account (HSA): Tax-deferred and tax-free earnings on eligible medical expenses.
What are tax-exempt investments? ›
A tax-exempt security is an investment in which the income produced is free from federal, state, and/or local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality.
How much money can you give away to avoid taxes? ›
According to the IRS, a gift occurs when you give property (like money) without expecting anything in return. If you gift someone more than the annual gift tax exclusion amount ($16,000 in 2022), the giver must file Form 709 (a gift tax return).
Do you get taxed for having a lot of money in the bank? ›
While the money you deposit into your savings account is not taxable, the interest generated is usually taxable. The exception to this rule is if you have an IRA or other tax-deferred retirement savings. Your tax status and income determine your marginal tax rate, determining how much you pay on your savings interest.
What money can the IRS not take? ›
Assets the IRS Can NOT Seize
Work tools valued at or below $3520. Personal effects that do not exceed $6,250 in value. Furniture valued at or below $7720. Any asset with no equitable value.
Do I have to pay taxes on my checking account? ›
It is essential to point out that the only taxable amount on your checking account is the interest earned. You do not have to pay any tax on deposits you make, provided these were not pre-tax income.
How can I avoid paying taxes on my savings account? ›
Tax-Advantaged Savings Accounts
The major tax-advantaged savings account options are: Roth Individual Retirement Account (IRA) or Roth 401(k): Interest earned in a Roth account is not taxed until it is withdrawn. And, if you are older than age 59 ½, you will owe no income taxes at all on the interest.
How Are Savings Accounts Taxed? Savings account interest is taxed at the same rate as your earned income. The interest you earn on regular savings, high-yield savings, money market accounts or certificates of deposit is reported to the IRS on Form 1099-INT.
How do I avoid taxes on a large sum of money? ›
Strategies to Minimize Taxes on a Lump-Sum Payment
- Tax-Loss Harvesting. Tax-loss harvesting allows you to lock in investment losses for the express purpose of lowering your taxable income. ...
- Deductions and Credits. ...
- Donate To Charity. ...
- Open a Charitable Lead Annuity Trust. ...
- Use a Separately Managed Account.
A tax-free retirement account or TFRA normally refers to permanent cash-value insurance policies that offer risk protection and tax benefits to individuals. A TFRA retirement account is not a qualified plan, so it doesn't follow the same rules as a 401(k).
Can you live tax free? ›
There are currently 14 countries with zero income tax in the world: Antigua and Barbuda, St. Kitts and Nevis, United Arab Emirates, Vanuatu, Brunei, Bahrain, the Bahamas, Bermuda, Cayman Islands, Monaco, Kuwait, Qatar, Somalia, and Western Sahara.
Which investments produces tax-exempt income? ›
Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they're exempt from state and local income taxes.
Are mutual funds tax free? ›
Long term capital gains upto Rs 1 Lakh is totally tax free. Dividends paid by equity mutual funds are tax free in the hands of the investor but the AMC pays dividend distribution tax (DDT) at the rate of 11.648%.
