Taxable income is the portion of your income that the Internal Revenue Service (IRS) can tax. It includes not only the wages you earn from your primary employment but also other sources of income that may surprise you.
Understanding what counts as taxable income is essential to avoid unexpected tax liabilities, penalties, interest, and audits.
What is Taxable Income?
Taxable income is the total income you earn in a year, minus any deductions, exemptions, or tax credits you're eligible for. It includes everything from your salary, tips, and wages to other forms of income that may not be as obvious. The IRS defines taxable income as all income you receive that isn't exempt from taxation.
Income that IS Exempt from Taxation
Inheritances
Gifts of up to $17,000
Life insurance proceeds
Child support payments
Scholarships for students
Workers’ compensation
Some disability benefits
Interest on municipal bonds
Surprising Sources of Taxable Income
While most people know that wages and salaries are taxable, there are some other unexpected sources that you may need to report:
Freelance or Gig Economy Income
If you earn money from freelancing, side jobs, or gig economy work (like driving for Uber or renting out your home on Airbnb), that income is taxable, even if you don’t receive a W-2. Keep track of all payments you receive, and if the total exceeds $600 from any single client, you should receive a 1099 form.
Bartering Income
Bartering is when you exchange goods or services with someone instead of using money. While it might seem like a trade, the IRS still considers the value of the goods or services exchanged as taxable income. If you barter for items worth over $600, you must report it on your taxes.
Unemployment Benefits
While unemployment benefits may seem like assistance rather than income, they are taxable. You may choose to have federal taxes withheld from your unemployment payments, but if you don’t, you could be in for a surprise when you file your return.
Social Security Benefits
Many people don’t realize that a portion of their Social Security benefits may be taxable, especially if they have additional sources of income, including but not limited to nontaxable interest from municipal bonds. If your combined income exceeds certain thresholds, you may have to pay taxes on part of your Social Security benefits.
Prize Money and Sweepstakes Winnings
Winning a prize or sweepstakes might feel like a windfall, but the IRS considers it taxable income. Whether it's a cash prize, a car, or other valuable items, you are required to report it. Prizes over $600 will typically come with a 1099-MISC form, but even smaller prizes should be reported as income.
Canceled Debt
If a lender forgives or cancels a portion of your debt, such as credit card debt, a mortgage, or a student loan, the amount forgiven is typically considered taxable income. This is known as "cancellation of debt income," and you may receive a 1099-C form from the lender. Even if you don’t receive a 1099, you are still responsible for including cancellation of debt income when calculating your taxes.
Why It’s Important to Report All Income
Failing to report all sources of taxable income can lead to audits, penalties, and interest on any unpaid taxes. It’s essential to keep detailed records of your income throughout the year and consult a tax professional if you're unsure about specific items. By understanding what qualifies as taxable income, you can better prepare for tax season and avoid surprises.
Make sure to stay informed about what you need to report, and don't hesitate to seek help if you’re unsure. Whether it's income from traditional work or unexpected sources like those outlined here, accurately reporting your taxable income ensures you're meeting your tax obligations and avoiding any unwanted issues with the IRS.
Key Takeaways
To avoid paying penalties and interest on unpaid taxes, you must report all taxable income, whether or not you receive a 1099. Remember that taxable income is anything the IRS doesn’t consider exempt.
Keep accurate records of any income received throughout the tax year. Then, include all income from salaries, wages, and tips, as well as the other sources of income mentioned here.
If you have questions about reporting income on your tax return, AMG Finance is here to help. Contact us to schedule an appointment with a knowledgeable tax professional.
