The first section on the 1040 personal federal tax form is for reporting your gross income. But, what exactly is gross income? Section 61 of the US Tax code states, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.” Some examples include wages, gross business income, interest, rents, royalties and dividends. Income can be received in the form of money, property or services.
The vast majority of this income you receive is considered taxable income. In fact, you can assume the income is taxable unless it is specifically exempted by law. All taxable income and some nontaxable income must be reported on your tax return. If you fail to include some taxable income on your return, you have underreported your income. The IRS claims that underreporting of income makes up the majority of the tax gap—the amount of tax revenue collected versus taxes owed.
Let’s take a look at some types of income taxpayers are surprised to find out are taxable. Some of my favorites are bribes, found property (fair market value when found) and jury duty pay. (As always, please contact your tax professional to see how your particular tax situation applies.)
Social Security – benefits may be taxable or partially taxable depending on your total income.
Unemployment Compensation – included in gross taxable income. You can have taxes withheld from your federal unemployment benefits during the year to limit surprises during tax time.
Gambling Winnings – included in gross taxable income. However, you may be able to take some gambling losses as itemized deductions. Stay tuned to upcoming blogs for details.
Alimony Received – included in gross taxable income. Alimony paid is often deducted on the paying taxpayer’s return. The IRS matches this information to ensure all alimony income is reported.
1099-C / Debt Forgiveness – generally included in gross taxable income if the taxpayer is personally liable for the debt. This can include cancelled credit card or medical debt. The Mortgage Forgiveness Debt Relief Act may allow homeowners to exclude some mortgage debt forgiveness from taxable income.
In the eyes of the IRS, income is taxable until proven nontaxable. Nontaxable income is always the exception. Here are some common types of income that Uncle Sam doesn’t tax. (Visit IRS Publication 525 for more details. http://www.irs.gov/publications/p525/index.html )
Municipal Bond Interest – usually exempted from federal income tax, but must be reported on tax return.
Child Support Payments – not taxable income and not reported on your tax return.
Life Insurance Proceeds – not taxable if paid to you due to death of the insured person.
Gains from Sale of Residence – you may be able to exclude all or part of a gain from the sale of your main home.
Worker’s Comp Payments – fully exempt from tax if paid under the Worker’s Compensation Act.
Employer Retirement Contributions – not taxable at the time of contribution to a qualified retirement plan.
There you have it! While the IRS taxes most of your income, they also allow deductions to ease your tax burden. We’ll begin looking at these next week. In the meantime if you have any questions, please call our office 314-849-6200 or email me at email@example.com.