The IRS Says Taxable Income is Most of What You Make - MrLiambi's blog

Breaking

My tweets

Advertisement

Wednesday, 16 March 2022

The IRS Says Taxable Income is Most of What You Make

There are an enormous number of side gigs that could help you earn a little extra cash each month. Whether you want to drive for Uber, deliver groceries, try your hand at freelance graphic design, or even officiate weddings, there have never been more opportunities to work for yourself.

Come tax season, however, this can get confusing. You might find yourself wondering what income is actually taxable. This is especially true this year, since you may have received child tax credit payments or other forms of COVID relief that may impact your return.

As it turns out, the IRS has pretty much thought of everything. There are a lot of particular rules about what the IRS considers a taxable income source and what it doesn't â€" but, in general, most sources are subject to taxation.

'Unfortunately, the IRS views almost all money received by taxpayers as taxable income,' said Aaron Lesher, a CPA with Hurdlr. 'The IRS even lists income from criminal activity as technically taxable, although if you're making a living from criminal activity, you're probably not too worried about that.'

We chatted with tax experts to tackle this complex question and ease some of the confusion. We then compiled this list of obvious and not-so-obvious taxable income sources you should know about.

For a full reference of what the IRS considers taxable versus nontaxable income, take a peek at its handy 39-page guide explaining all of the applicable tax rules for preparing your 2021 return.

What Does the IRS Actually Consider Taxable Income?

Here are the things you must report to the IRS as taxable income this spring.

1. Your Salary

This one is the type of income most people are familiar with. If you get a steady paycheck from an employer, you need to report this income to the IRS. Your salary also includes bonuses and commissions.

2. Tips

Waitresses, waiters, bartenders, and other folks who work for tips must report them as income to the IRS. This includes cash tips.

'All income must be reported, even if it's not deposited into the bank. And yes, the IRS and state (government) have ways of figuring out that there may be unreported income,' said Abby Eisenkraft, an IRS enrolled agent, accredited tax adviser and preparer, retirement planning counselor, and the author of '101 Ways to Stay Off the IRS Radar.'

3. Freelance Income

You should treat freelance income just like you'd treat your regular salary. Even if you don't receive a 1099-MISC from the company you worked for, it doesn't matter, according to Eisenkraft.

'All income gets reported, whether or not a reporting document is received,' Eisenkraft said.

4. Worldwide Income

Let's say you live in the United States but earn income from a company based overseas. Even if you don't receive a W-2 or 1099 from the overseas company, the IRS wants to know about this income.

'If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S,' according to the IRS website.

5. Bartering

Bartering doesn't typically feel like money in your pocket. But if you trade a product or a service for something that has value, the IRS considers this income, said Eisenkraft. The rules and procedures for reporting bartering income depend on the type of bartering that takes place, so if you're big into making trades, check out the IRS's Bartering Income page.

6. Gambling Winnings

Gambling winnings are 'fully taxable,' and you must report them on your tax return, according to the IRS.

'Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips,' according to the IRS website.

The upshot is that you can also deduct your gambling losses, which might help offset some of the pain.

7. Jury Duty Pay

If you served on a jury and got paid for your time, the IRS wants to know how much money you earned. 'If you turn over your jury duty pay to your employer in exchange for continuing to receive salary pay you can deduct that amount,' said Josh Zimmelman, owner of Westwood Tax & Consulting in New York.

8. Hobby Income

Even if your love of buying and selling old stuff is just a hobby, you have to tell the IRS if you make any money from antiquing. And, unfortunately, you can no longer deduct your hobby expenses in the process. The same applies to items that you sell or flip online.

The primary distinction between a business and a hobby is intent â€" in this case, intent to make a profit. The IRS has a useful list of factors to consider when determining if your hobby is actually classified as a business.

9. Illegal Activity

This one is a head-scratcher. If you earn income from illegal activities, 'such as money from dealing illegal drugs,' the IRS says you must report it. An honest criminal, perhaps?

10. Bribes

Speaking of stuff that's illegal, the IRS also says you must report any bribes you receive as income. There are also separate sections about stolen property and kickbacks â€" you need to report these, too.

11. Canceled Debts

If creditors forgive some or all of your debt, the IRS considers this income. There are some exceptions to this rule, such as debt canceled as a gift or inheritance and student loan debt forgiven under certain programs.

You can view the full list of exceptions (it's a long one!) on the IRS website. Debt forgiveness is a complex topic, so be sure to go over your specific situation with a tax expert.

This is shows a broken heart with two people and a child in the middle of them to represent divorce.

What the IRS Considers Nontaxable Income

Here's where things start to get interesting. There are also dozens of things the IRS does not need you to report as income. Again, it's a long list, so be sure to visit the IRS's official tax guide before filing your taxes this year.

1. Olympic Medals and Other Winnings

You won't have to pay income tax if you win an Olympic or Paralympic medal and the associated prize money if you made less than $1 million that year â€" great news for anyone who competed in this year's Winter Games. In the past, athletes were subject to a 'victory tax' on their winnings, but no longer.

2. Child Support

Divorce has confusing tax implications. Fortunately, one thing is clear: child support is not considered taxable income. This is good news because raising kids is expensive â€" every penny helps.

3. Carpool Money

If you're a regular driver in a carpool, the IRS does not consider any money you get from your passengers as income, unless you started a legit, for-profit carpooling business. The IRS considers these payments reimbursement for your expenses.

4. Holocaust Victim Restitution

The IRS does not consider restitution payments to Holocaust victims (or the heirs of victims) taxable income. This also includes European insurance payouts made as a result of World War II.

5. Holiday Food Gifts

The IRS sees a difference between a Christmas cash bonus and other gifts you might receive from your employer. 'If your employer gives you a turkey, ham, or another item of nominal value at Christmas or other holidays, don't include the value of the gift in your income,' according to the IRS.

6. Crowdsourced Money

Crowdsourced funds from sites like GoFundMe are not considered taxable income by the IRS â€" provided a few conditions are met. The money must be given as a gift, with no goods or service provided in exchange, and it must go to an individual, not a business.

7. Alimony

If you receive alimony (court-ordered payments from one spouse to another) after a divorce, you do not have to report it as income, according to the IRS.

Our list isn't exhaustive by any means, but it should give you a good sense of how the IRS views your money. If you're earning income that we haven't covered here, be sure to consult with a tax expert or the IRS directly.

Frequently Asked Questions (FAQs) About Taxable Income

If you've got questions about what the IRS considers taxable income, you're in the right place. We've rounded up the most common questions about taxable income below.

What Is Considered Taxable Income?
The vast majority of income sources are considered taxable by the IRS. Although there are some exceptions, they're few and far between, and generally fall into pretty specific categories.

All of the most common forms of income are taxable:

  • Your salary
  • Tips received in addition to your salary
  • Freelance income
  • Income made from overseas companies
  • Gambling winnings and illegal bribes (yes, really)
  • How Do I Know My Taxable Income?
    In short, your taxable income is your gross income minus available deductions. Here's a simplistic breakdown:
    1. Determine your filing status. This will inform which deductions you're able to take because spouses filing separately can't both claim the same deduction.
    2. Gather up and add together all your income sources. This includes your salary, plus any tips and side income you earned over the year.
    3. Calculate your deductions. For most, this means taking the standard deduction.
    What Income Is Not Taxable?
    The majority of income for the majority of individuals is considered taxable income by the IRS. However, there are some notable exceptions:
  • Olympic medals and earnings
  • Child support and alimony
  • Carpool money
  • Holocaust victim restitution payments
  • Holiday food gifts from your employer
  • Crowdsourced money from GoFundMe and similar platforms
  • There are other sources of nontaxable income â€" check the IRS website for the full list.

    What Is the Difference Between Income and Taxable Income?
    Your gross income is all of your income, from all sources. Your taxable income is the portion of your gross income that is subject to taxation by the IRS. Typically, your gross income is higher than your taxable income.

    Penny Hoarder contributor Dave Schafer has been writing professionally for nearly a decade, covering topics ranging from personal finance to software and consumer tech. Reporting by former contributor Sarah Kuta is included in this story.

    This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.



    Source : https://www.thepennyhoarder.com/taxes/irs-taxable-income/?aff_id=178&aff_sub3=MainFeed__taxes/irs-taxable-income/

    No comments:

    Post a Comment