Common misperceptions and questions about income tax

By Frank Minuti, CPA

I am in the 25% federal income tax bracket and will earn $200 more which will put me into the $28% tax bracket by $100. How do I avoid having all my income tax at 28%?
There is a common misconception that when you move from one tax bracket to the next all of the income is taxed at the higher bracket rate. In this case, only the $100 that will be in the 28% tax bracket will be taxed at 28%. The dollars in the lower income tax brackets are still taxed at the rate of each tax bracket.

I received a $50,000 inheritance, how much in taxes do I have to pay?
The dollars a beneficiary receives from a decedent generally pass income tax free to a beneficiary. If the estate of the decedent is subject to estate tax the estate tax is paid prior to the distribution of the remaining assets to the beneficiary. Should the estate earn income on the assets in the estate prior to distribution, then the beneficiary could be taxed on that income. This should in most cases be a minimal amount compared to the total dollars received.

I received $50,000 as the beneficiary of a life insurance policy on the death of my parent, how much tax do I have to pay?
The answer depends on who is the owner and who is the named beneficiary of the policy. If the policy is owned by the decedent or the decedent is the named beneficiary at the time of death then the dollars are included in the estate of the decedent and subject to estate taxes. If you are both the owner and beneficiary of the policy on your parent then the dollars will flow to you income and estate tax free. Often times parents gift dollars to an irrevocable life insurance trust that purchases the policy with the child or children named as the beneficiary(s). With proper planning this can be done without incurring income, gift or estate tax liability.

I am a professional and traded professional services for construction work, is that taxable income to me?
The value of the construction work you received is taxable income to you and the contractor should report the value of the professional services you provided as taxable income.

I find the filing of my annual income tax return to be stressful. How do you cope with the stress of preparing so many returns?
Saturday at his private gym, my physical trainer Aaron Daugherty (of Physical Image in Soquel (831)566-4228) and I were talking about the upcoming tax season. He stated that some of his clients are already talking about and stressing over filing their 2010 income tax returns. I have been working with Aaron for a number of years now and have found that he does a great job working with clients under stress and with helping people add years of physical well being to their lives.