Tax season is coming up for many New Yorkers as April rolls around the corner. The Internal Revenue Service has strict tax guidelines. This FAQ answers frequently asked questions on income taxes. Refer to www.irs.gov for specific details.
How can a person avoid paying state estate or inheritance taxes?
If a state imposes estate or inheritance taxes, there probably isn’t much a person can do. New York has no inheritance tax. If a person lives in different states, say a celebrity who lives in the fall in New York, and the spring in California, the person may save taxes by making the lower tax rate state the legal residence. An individual’s citizenship is that of physical residence, combined with intent to make the state a permanent home.
2. When would an estate need to pay federal taxes?
The federal government imposes estate tax at a person’s death when the individual’s property is worth over $3.5 million.
3. Can someone give away property before death to avoid estate taxes?
Under federal law, if an individual gives away more than $13,000 per year to any single person or non-charitable institution, the individual is assessed federal gift tax. Federal gift tax applies at the same rate as the estate tax. Making gifts of $13,000 or less, may result in estate tax savings if a person does it repeatedly.
4. How can someone avoid paying estate taxes?
A married couple can set up a trust to leave property in trust for children, but give the surviving spouse the right to use the asset during life. This decreases the surviving spouse’s taxable estate by half the size it would be if the asset were left entirely to a surviving spouse. The trust postpones estate taxes until the second spouse dies, and benefits the couple’s children when a surviving spouse dies rather than a new spouse if the surviving spouse remarries before dying.
5. Are personal injury awards taxable?
Personal injury awards that stem from physical injuries such as those sustained from a vehicle accident are not taxable.
6. If a person works as an independent contractor and does not get funds for the work until the next year after the work is completed, are the funds reportable as income in the next year or the year the person completes the work?
If the independent contractor does not get access to the funds before the Form 1099 due date, the independent contractor reports the funds as income in the next year.
7. Do people have to pay taxes for college scholarships?
A qualified scholarship is not taxable when a person uses it for tuition or educational fees, such as supplies, books and required equipment. The individual must be a candidate at an educational institution for a degree.
8. Are tips taxable?
Yes. Tips are considered income.