The world of income taxes can be daunting for the average person, which is why you should hire a professional team that will ask the right questions and helps you get the most out of your money. You should always consult your CPA or tax professional when making adjustments related to your tax filing.
The Tax You Pay Depends on How the Income is Generated
There are three broad categories of taxable income.
Earned Income
Earned income is the money you work for every day.
Types of Earned Income
- Wages, salaries, and tips
- Gig economy work
- Money made from self-employment
Unearned Income
Also known as passive income. This could be in the form of real estate investment or income from business partnerships.
Real estate has become more popular as a passive income stream as people are becoming more knowledgeable on how their money can work for them rather than them working for the money. It is an investment where you can generate passive income and, when done properly, does not correlate to stock market volatility.
Portfolio income is another form of unearned income generated from stock market investments, brokerage accounts, dividends, interest, and capital gains.
Retirement Income
Retirement income is Social Security, pension, and retirement accounts like IRAs and 401(k)s. This income can be fully or partially taxed.
What Income Do You Not Pay Taxes On?
Examples of income that is customarily not taxed include:
- Inheritance
- Bequests
- Life insurance
- Roth IRAs
- HSAs
- 529 plans (when used for approved educational expenses)
- Loans from a properly designed life insurance policy
Understanding the tax liability on the money you’ve been earning or have been gifted, and when you need to pay that liability is essential. For example, if you receive a large gift, you won’t have to pay tax on it, but the person gifting it to you will have to pay gift tax. Understanding the fine print is crucial when paying taxes.
How Does Prevail Help You Manage Your Income Taxes?
We spend all year prepping you for tax season. With the current market volatility, it’s safe to say that the old way of managing your finances has passed, and a new diversified approach to wealth management is necessary. We are always up to date with the latest tax changes and help our clients invest smarter. At Prevail, we use strategies that include pre-tax, post-tax, and tax-free vehicles to help you keep more of what is yours. We use a team-based approach to help custom design your wealth creation strategy.
If you want to find out how to pay less tax and keep more of your hard-earned money, contact one of our advisors.
