You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.
Do you know the tax status of other types of income? Here’s a quiz to test your knowledge.
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You tell your son he’ll be the sole beneficiary of your estate, and that you’ve decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he’ll have to pay in taxes. What do you tell him?
Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary. -
You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you’re not of retirement age. Do you have a taxable event?
Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it’s not included in your income and you can withdraw it penalty- and tax-free. -
You purchase a piano at an auction and take it home. While cleaning it, you discover $5,000 inside. Is this money taxable to you?
Answer: Yes. Once it becomes yours, “treasure trove” property is taxable to you at fair market value.