The IRS defines taxable income as income generally available to you. This includes income that may not currently be in your possession. There are some sources of nontaxable income, but you may still be required to file them on your annual tax return; you just will not have to pay taxes on this income. Because having nontaxable income is beneficial, we have written a separate post on that.
When determining which amounts are taxable and nontaxable, it’s a good idea to work with a qualified tax professional, someone who understands and follows the many tax laws. They can best advise you on how to file your taxes the right way. Working with a qualified tax professional is the smartest way to avoid an unexpected tax bill come tax season.
Learn more about the differences between taxable and nontaxable income in this blog post.
A qualified tax consultant can also help you find the best tax benefits. This can be quite rewarding, especially if you expect to owe a lot to the IRS on your next tax bill. These benefits may be in the form of tax credits or tax deductions, for example. Tax credits reduce your tax bill dollar for dollar and may even result in a tax refund if the tax credit is refundable.
Tax deductions, on the other hand, reduce your taxable income by the amount of the tax deduction if you are able to take the full amount. One popular tax deduction is for charitable contributions. As nice as they are, unfortunately, tax credits and deductions can be confusing, so working with a qualified professional may help you save time and money.
What is taxable and nontaxable income?
Taxable income is income that you must pay taxes on when you file your annual tax return. Nontaxable income is income that is typically tax-free income. You do not pay taxes on this income, but you still may need to report it on your taxes.
An example of nontaxable income would be child support you receive or financial gifts under a certain amount of money. For more information on taxable and nontaxable income, please refer to IRS Tax Publication 525: Taxable and Nontaxable Income.
Type of Taxable Income
1. Alimony
Alimony, while rightfully yours, still counts as taxable income, so you will need to pay taxes on it. It’s a nice income to have, especially if you have children to take care of, but unfortunately, you will have to pay taxes on it.
2. Barter Income
Barter income occurs when you are in the trade business. Maybe you trade one service for another but receive a paycheck in the process, or perhaps you just receive goods and services for what you trade to other merchants. It’s all still taxable.
3. Jury Duty Pay
Jury duty pay is treated just like any other taxable income; you were getting paid to be there and participate in the jury, so you do need to report it and pay taxes on that income.
4. Cash Income
If you just started a small business, you may not think it counts, especially if it is just a side hustle where you are only making a little extra money. Maybe you are mending clothes on the side or just started a small lawn mowing business. Unfortunately, cash income does count as taxable income, so you will need to report it and pay taxes on it.
5. Interest and Dividends
Interest received from real estate deals is considered to be taxable income. For more information on the taxes that you may need to pay on real estate deals, check out our real estate and taxes article.
6. Retirement Plan Withdrawals
Most retirement plan withdrawals are taxable, unfortunately. You will need to put them on your tax return and pay taxes on the income you receive from your retirement plans.
7. Court Awards
While it may not seem like income, court awards do count as taxable income, so you’ll be paying taxes on this amount.
8. Unemployment Benefits
It’s hard being out of work, but when you receive unemployment from an employer-paid plan, it is taxable income that you will have to report and pay taxes on. You may be able to offset this with tax deductions or tax credits; it’s all dependent on your tax situation.
9. Gambling Income
If you are a professional gambler, you will need to know how to report your income because, unfortunately, it is taxable. If you have won the lottery, you will also need to report that income. It’s a good idea to have a solid grasp of this information before recording it on your tax return. Treat it like any other income when you record it.
10. Hobby Income
Some income is to be recorded as a business income; this is when your hobby takes on a life of its own. However, some income may just be due to your hobby. This can be quite confusing, especially if you did not plan for your hobby income to become a business income. The benefit is that you may be able to deduct business expenses.
Frequently Asked Questions
What is the difference between income and taxable income?
Income is generally any amount that you receive. Taxable income is any money that is taxable, according to the IRS. Most income is taxable unless specifically stated to be nontaxable by the IRS.
Make sure you understand which income you need to pay taxes on. You will need to report all income on your annual tax return, including life insurance payouts and municipal bonds.
How can I file my tax return?
When filing your tax return, you will want to determine what your filing status is, whether you are being claimed as a dependent by someone else or not, and what deductions and credits you are able to take. You will probably be filing your tax return on IRS Form 1040 or IRS Form 1040-SR. Any tax forms that you will need should be mailed to you in advance unless they are the forms you are using to file, which can be found on the IRS website.
What is my filing status?
There are five filing statuses available to taxpayers. Generally, you cannot choose which one to take; they are based on your marital status. If you are married, you can choose to file joint or separate tax returns. Other filing statuses that are available include head of household, single, and surviving spouse (qualifying widow/widower with a dependent).
What type of income needs to be reported to the IRS?
Most income will need to be reported on your tax return and generally is taxed at your tax rate, which is dependent on your filing status and income parameters. Nontaxable income that may need to be included could be Social Security disability payments, capital gains, and inheritance taxes. Taxes can be quite complicated, so meet with an expert for more information.
What tax deductions can I take?
Some of the tax deductions that may be available for you to take include the home office tax deduction, the charitable contributions tax deduction, and the standard tax deduction. If you have medical expenses, you may want to itemize your deductions so that you can take full advantage of these write-offs.
In Conclusion
Are you wondering if your income is considered to be taxable or nontaxable? Does this topic still confuse you? You may want to sit down for a tax consultation with our tax accountant.
We will see what we can do to get your taxes done in the most beneficial way possible while, of course, following all tax laws to the letter. Contact us today for more information.
Are you having trouble filing your annual tax return yourself? Do you need a little help? When trying to file your 2020 tax return, you are probably using IRS Form 1040 or IRS Form 1040-SR.
You may want to itemize your deductions, or perhaps taking the standard deduction is most beneficial. It can be quite confusing, especially when you add in state taxes.
For the latest information for the current tax year, please check out our tax rates and tax brackets, which are updated each year. If you need help with tax preparation, we can do that, too. You may want to determine if you have nontaxable income and need to report it on your annual tax return. Our tax accountant can help you with that.
For more help with filing your annual tax return, please contact our office. We are happy to assist you in any way that we can. You can trust Indiana’s tax expert!
We are even qualified to represent you in the event of an audit if that is something you are expecting. We can also help you with any audit triggers you may be concerned about.
