Generally speaking, the majority of the income you earn is taxable. However, there are several important exceptions. Here’s a list of taxable vs. not taxable income.
What is Taxable Income?
Most of the money you make is considered taxable income, with just a few exceptions. Here are the most common types of taxable income, plus some that aren’t so common:
- Wages and Salaries
Any hourly wages you make are taxable. Generally, your employer will deduct taxes from your paycheck.
If you work in the service industry and make tips in addition to your hourly wage, you are required to report that income and pay taxes on it, even if those tips are in cash.
- Unemployment Compensation
If you have been fired or laid off and are receiving unemployment as you look for a new job, that income is taxable. However, these taxes will not be automatically deducted from your unemployment check. Depending on how much you qualify to receive in unemployment, this could mean you owe a fair amount of taxes by the end of the year. However, you can arrange to withhold taxes from your unemployment checks automatically.
If you’re self-employed, all the income you earn is subject to self-employment tax. However, since these taxes are not automatically taken out of your paycheck, you are required to make the payments yourself. For the 2017 tax year, the self-employment tax was 15.3 percent. If you expect to make more than $400 in a tax year, you are required to pay self-employment taxes. If you expect to owe more than $1000 in taxes because you made more than about $6500 through self-employment, you are required to pay estimated quarterly taxes. Self-employment income includes everything from babysitting to housesitting to owning your own business.
- Non-cash Income
Very few people know that items you barter for are also considered taxable. If you trade goods or services with someone in place of paying cash, you are required to pay tax on the full market value of that item. Also, both parties are required to report the exchange on Form 1040.
What is Not Taxable Income?
As a taxpayer, you do not have to pay taxes on the following types of not taxable income:
- Child-support payments
- Inheritances, gifts, or bequests
- Worker’s compensation benefits
- Welfare benefits
- Cash rebates on goods from a dealer or manufacturer
- Damages received for physical injury or a physical illness
- Meals and lodging provided by your employer for a work-related event
There are also additional categories that, depending on the circumstances, may not be considered taxable income:
- Life Insurance
If you’re the beneficiary of a life insurance policy, that amount is not taxable. However, any interest received on the initial amount is taxable and should be reported as interest earned.
- Scholarships and Grants
You’re not required to report scholarships, grants, or fellowships as taxable income if you’re enrolled in an accredited program and working toward a degree. However, amounts received specifically to pay for room and board qualify as taxable income.
Although you’re required to pay income tax, there are exceptions that are important to know about so that you can tell the difference between taxable income and non-taxable income. By researching whether or not the income you’ve earned is taxable, you can avoid the costly errors of paying tax on income when you don’t have to or not paying tax on income when you should.
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