casa-caregiver-cheat-sheet-logoThis week, we bring you a tax season bonus blog on one of the most perplexing situations in IRS-World: the taxable event. Taxable events aren’t always intuitive, but identifying them is vital to staying on the right side of the IRS. If you don’t recognize and acknowledge a taxable event in your life, rest assured that the IRS will – sooner or later. You definitely don’t want it to be later! So this week’s Caregiver Cheat Sheet reviews the most common types of taxable events, so caregivers, home care aides and loved ones can avoid honest but costly mistakes.

Simply enough, a taxable event is any occurrence or event that produces a tax liability. As money comes and goes, you are likely to conduct transactions that are taxable in whole or in part. Just in time for tax season, here’s list of six common taxable events, plus a bonus! Taxable events include – but are not limited to – when:

  1. You receive income in the form of a paycheck: income is taxable, no matter what your tax bracket ultimately is.
  2. You receive dividends from stock you own: dividends represent a gain above what you paid for the shares of stock, so they are taxable.
  3. You realize a capital gain from real estate: a capital gain occurs when your house increases in value above what you paid for it, and you sell the house for a profit. If you bought your home for $200,000, and its value increases over time to $300,000, you will owe tax on $100,000 when you sell your home. It’s not a taxable event until you have ‘realized’ the gain by selling it.
  4. You realize a capital gain from stocks: a capital gain occurs when your mutual fund or stock portfolio increases in value above what you have paid into it, and you sell all the stocks for a profit. This also applies to the sale of all your shares of one stock, or even one share of one stock. You must track what you paid for the shares you’re selling, and measure the difference between what you paid and what you receive from the sale. The difference is taxable in the year that you sell the stock(s). It’s not a taxable event until you have ‘realized’ the gain.
  5. You withdraw money from a 401(k) or IRA (aka a qualified account): Money deposited in a qualified account is tax-deferred, meaning whatever money you contribute during a tax year is deducted from your gross income before you calculate your taxable income. The tax is called ‘deferred’, because though you didn’t pay income tax on it in the year you deposited it, you will pay tax on it the year you withdraw it.
  6. You withdraw earnings from a Roth IRA: The only exception to the ‘qualified account’ rule is a Roth IRA, which is only funded with ‘after-tax’ dollars, or money that you include in your taxable income in the contribution year. The money you contribute to a Roth IRA funds can be withdrawn tax-free at any age. But, the earnings are taxable and subject to penalty under certain circumstances.
  7. Bonus event: the early withdrawal penalty on money withdrawn early from a 401(k) or IRA (aka a qualified account). The IRS defines ‘early’ as withdrawal before you have reached age 59 ½. So if you withdraw $1000 from your traditional IRA at age 50, you will pay income tax plus a 10% penalty for early withdrawal in addition to the taxes you owe. Rollovers, when you move your IRA funds from, say, a former employer to a new account, don’t incur taxes or penalties if you complete them within 60 days.

Major disclaimer: we aren’t tax professionals, and this isn’t tax preparation advice. If you’re not 100% sure about whether or not you have to account for any taxable events, please consult a tax professional. There are talented people out there who think this subject is interesting, so let one of them help you! This is the kind of thing the IRS takes pretty seriously, and ‘oops’ doesn’t hold much water with them.