According to the Internal Revenue Service, all income is taxable under law and must be reported on your tax return. Failure to appropriately report income can result in penalties, fines and interest accrued on unpaid back taxes. Understanding your tax liability can help you better manage your money and avoid potential audits from the IRS.
All earned wages are taxable, including tips, royalty payments, profit-sharing income and bonuses, fringe benefits and stock options. Even if your employer mails you a check on Dec. 31, and you don’t receive it until Jan. 4, that income is still considered taxable for the previous year and must be counted as such. Prepaid income is considered taxable in the year the payment was issued. For example, if you are paid a six-month retainer on Oct. 1, and the payment covers contractual services through the following March 1, the entire payment is considered taxable income for the year in which it is received, even if services are not rendered until the following year.
Any income you derive from selling goods or services is considered taxable income, including proceeds from a garage sale or online auction venue. Businesses that are S corporations pay taxes in a prorated way, with each shareholder reporting his own individual percentage share based on his ownership interest. The IRS views income generated by business partnerships and sole proprietors as personal income for the individual partners or single owner. These individuals must claim their business income as personal income on their tax returns.
Rental, Investment and Retirement Income
Income received through property rental is taxable. This includes real estate, vehicle and machinery rental. Income from investment portfolios containing stocks and bonds is taxable, as is retirement income, including funds from nonqualified deferred compensation plans and early 401 (k) withdrawals.
Unemployment Benefits and Scholarships
Income received in the form of unemployment benefits or disability income is considered taxable. So are scholarships and grants issued to students to apply toward their educational pursuits.
Gambling and Capital Gains Income
Any money derived through gambling is taxable under tax law. Capital gains income realized through the sale of real property or capital assets is taxable, including any real estate profits beyond $250,000 for single filers. Proceeds from the sale of collectibles and precious metals are subject to tax. The gain is determined by subtracting your cost from the sales price: For example, if you purchased a painting for $1,000 and sold it for $5,000, you would owe taxes on your gain of $4,000.
Video of the Day
- Comstock/Comstock/Getty Images