What income is subject to tax?
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UPDATED: Dec 12, 2019
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When it comes to income and taxes, all income is subject to tax. Income translates to gross income and “gross income means all income from whatever source derived.” Gross income includes items such as compensation for services (wages, fees, commissions, etc.), income from business, interest earned, rents, royalties, dividends received, receipt of alimony and separate maintenance, annuity or income from life insurance and endowment contracts, pensions, discharge of debts, barter income, a percentage of Social Security benefits, strike benefits, sick pay, income in respect of a decedent, and income from an interest in an estate or trust. Even income derived from illegal activities is subject to tax.
How to Determine Taxable Income
The best way to determine which forms of income are subject to tax is to consider the documentation used for the forms of income. For instance, IRS income forms that are filed by your employer and sent to the IRS annually show taxable income. In fact, if you used the correct withholding amount, the taxes have already been collected for this income and you will not owe anything further to the IRS.
Some other tricky sources of income include raffle prizes, bonuses, profits from the sale of certain property such as homes and artwork, and business-related perks such as airline miles that your work permits you to use for personal vacations. Also, any time debt is forgiven, the amount forgiven is considered income and is taxable. Non-taxable income includes anything that was considered an even trade, exchange, or barter. For instance, if you traded your year-old car seat to a friend for your friend’s old double stroller, you have made an even exchange that is not taxable.
While all income is considered taxable, many people do not fully report their income and then end up being audited as a result. If you are unsure what is considered taxable income and what is not taxable income, consult with a tax specialist or a tax attorney. It is always better to be safe than sorry because all back taxes that you owe have interest applied to the amount owed.