Excellent Tax Services: What is Taxable and Nontaxable Income?

Taxable or Nontaxable?

Generally speaking, all of your income is taxable unless it is specifically exempted by law. All the taxable income must be reported on your tax return and is subject to tax. Income that is nontaxable may also have to be shown on your tax return but is not taxable. In brief, income can include the following.

Constructively-received Income: You are generally taxed on income that is available to you, regardless of whether it is actually in your possession, for example, a valid check that you received before the end of the tax year is considered income constructively received in that year by you, even if you do not cash the check or deposit it to your bank account until the next year. You must include the amount in your income for that tax year when you file your tax return.
Assignment Income: Income received by a third party for you is considered an income that you received in the year when the third party received it. You must include the amount in your income when the party receives it, for example, both you and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when your former spouse receives it.
Prepaid Income: Income that you received in advance for your future services is generally included in your income in the year when you receive it.
Employee Income: You must include in gross income everything you receive in payment for personal services. This includes wages, salaries, commissions, fees, and tips, as well as other forms of compensation such as fringe benefits and stock options.
Business Income: Rents from personal property, for example. If you rent out your personal property, such as equipment or vehicles to others, how you report your income and expenses is determined by:
- Whether the rental activity is a business, and
- Whether the rental activity is conducted for profit.
Generally speaking, if your primary purpose is income or profit and you are involved in the rental activity, then your rental activity is a business and the income is taxable.
Investment Income: Interests and dividends that you received from your investments, for example, is an investment income which is taxable.
Partnership Income: A partnership is not a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items. You must report these items on your tax return. However, your loss is limited to the adjusted basis of your partnership interest at the end of the year in which the loss took place. Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership Income. This shows the result of the partnership's operations for its tax year and the items that must be passed through to the partners.
S Corporation Income: An S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's share. You must report your share of these items on your tax return. An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation. This shows the results of the corporation's operations for its tax year and the items of income, losses, deductions, or credits that affect the shareholders' individual income tax returns.
Royalties Income: Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income. You generally report royalties in Part I of Schedule E (Form 1040), Supplemental Income and Loss. However, if you hold an operating oil, gas, or mineral interest or are in the business as a self-employed writer, inventor, or artist, then report your income and expenses on Schedule C or Schedule C-EZ (Form 1040).
Bartering Income: Bartering is an exchange of property or services. You must include in your income, the fair market value of property or services you receive in bartering at the time you received.