What Income Does the IRS Consider Taxable?
Most everything in between? Taxable.
Here are some common income sources and whether the IRS considers them taxable. This information was taken from IRS Publication 17, Your Federal Income Tax.
Wages, salaries and tips
If you are an employee, you should receive Form W-2 from your employer showing the pay you received for your services in box 1. Even though you may not be required to file because of the small amount you earned, if you had any federal income tax withheld in box 2, file to claim this as a refund.
All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.
Babysitting
If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are self-employed and must include payments for your services on a Schedule C, Profit or Loss from Business.
Of course, this assumes you earned enough to kick in a filing requirement. For 2010, single individuals under 65 did not have to file a tax return unless they earned $9,350 or more.
Severance pay
You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract.
Sick pay
Pay you receive from your employer while you are sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from an insurance company, if your employer pays for the plan. If you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable.
Clergy pay
If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it is not taxable to you.
Military service
Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. For more information on the tax treatment of military allowances and benefits, see Publication 3, Armed Forces' Tax Guide.
Payments made by the Department of Veterans Affairs (VA) are not taxable.
Workers' Compensation
Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act. If your workers' compensation reduced the total amount of social security benefits you were also eligible for, then that amount may be taxable.
Interest
Interest income is generally reported to you on Form 1099-INT by banks, savings and loans, and other payers of interest. This form shows you the interest you received during the year, and is taxable. You do not have to attach this form to your tax return.
Dividends
Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Most dividends are fully taxable.
For more information on interest and dividend income, see IRS Publication 550, Investment Income and Expenses.
Rental income
Generally, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property you own. Rental income is reported on Schedule E, and the amount you are taxed on is reduced by a number of expenses, including the amount you may pay for the mortgage loan.
Retirement plans / IRA
Generally, any distribution you take from an IRA is considered taxable. If you took an early distribution (prior to reaching age 59 1/2) you may have to pay the 10 percent penalty in addition to the tax. If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. You have 60 days to do this.
Social Security benefits
If you are only receiving social security, then none of your benefits are taxable. If you are also receiving other sources of income, including investment income, then a portion of your benefits may be taxable. Use the worksheet in Publication 915 to find out.
Canceled debts
If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. You must include this as income.
Typically, a 1099-C is sent to a taxpayer when a home is foreclosed on or when a vehicle is repossessed, and the lender was not able to satisfy the original amount due on the loan by selling the asset to another party. Unsecured consumer debt, like credit cards that get wiped out via a bankruptcy filing, also may trigger a 1099-C.
Life insurance proceeds
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. If you are holding a whole life policy, then interest income received as a result of life insurance proceeds may be taxable.
Child support & alimony payments
You should not report child support payments on your return. However, alimony typically is taxable. The person paying child support also cannot take a deduction; alimony payments conversely can be deducted.
Unemployment
You must include in income all unemployment compensation you receive. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you.
Gambling winnings
Depending on the amount won, you may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. This is taxable. Remember, you can deduct your losses up to the amount of your winnings, but you must maintain a log of the losses in the event the IRS asks you to substantiate the expense.
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