Taxable income is an important concept in personal finance as it determines the amount of income that is subject to taxation. It includes various sources of income, and understanding these sources can help individuals make informed decisions about their finances.
1. Capital gains and losses: When you sell an asset such as stocks or real estate for a profit, the difference between the purchase price and the sale price is considered a capital gain. Conversely, if you sell an asset for less than its purchase price, it results in a capital loss.
2. Rental income: If you own property and receive rental payments from tenants, this income is taxable. You may also deduct certain expenses related to managing the property.
3. Self-employment income: If you work for yourself as a freelancer or contractor, your business profits are considered self-employment income and are subject to taxation.
4. Dividend income: Dividends received from investments in stocks or mutual funds are generally taxable unless they qualify for specific tax breaks like qualified dividends.
5. Interest income: The interest earned on savings accounts, bonds, or loans made to others is typically taxable unless it falls within certain exemptions like municipal bond interest.
6. Alimony and child support payments: While alimony received is taxable, child support payments are not considered taxable income.
7. Social security benefits: Depending on your overall income level and filing status, a portion of your social security benefits may be subject to federal taxes.
8. Unemployment compensation: If you receive unemployment benefits during periods of joblessness, this amount may be subject to federal taxes depending on your total household earnings.
9. Gambling winnings and losses: Any winnings from gambling activities should be reported as taxable income while eligible gambling losses can potentially offset those winnings for tax purposes.
10. Scholarships and grants: In general terms, scholarships that cover tuition fees but not living expenses are not considered taxable incomes; however other types of scholarships/grants and the use of funds may be taxable.
11. Royalties and licensing fees: Income received from intellectual property rights, such as royalties from books or music, is considered taxable income.
12. Foreign earned income exclusion: If you live and work outside the United States for a certain period, a portion of your earned income may qualify for exclusion from federal taxes.
13. Health savings account (HSA) contributions and distributions: Contributions to an HSA are generally tax-deductible while qualified medical expenses paid using HSA funds are tax-free.
14. State and local tax refunds: If you received a state or local tax refund in the previous year, it may be subject to taxation if you itemized deductions in that year.
15. Noncash fringe benefits: Certain employer-provided benefits like company cars or housing allowances have a cash equivalent value that is included in taxable income.
16. Bartering income: If you exchange goods or services with others without involving money, the fair market value of those items must be reported as taxable income.
17. Cancelled debt: In some cases where debts are forgiven by creditors, the amount forgiven is considered taxable income unless specific exclusions apply (e.g., bankruptcy).
18. Farming and fishing income: Farmers and fishermen have special provisions regarding their incomes for tax purposes due to the unique nature of their businesses.
19. Jury duty pay: The compensation received for serving on a jury is generally considered taxable income at both federal and state levels.
20. Military pay and allowances: Most military pay including base pay, bonuses, hazard-duty pay, etc., is subject to federal taxes but can receive certain exemptions during active service time spent overseas.
21. Early withdrawal penalties from retirement accounts: Money withdrawn before reaching retirement age from traditional IRAs or 401(k)s usually incurs penalties along with being taxed as ordinary income
22.Moving expense reimbursement: While most moving expense reimbursements are taxable, certain exceptions may apply for military personnel or specific job relocations.
23. Foster care payments: Payments received for providing foster care to children are generally considered taxable income.
24. Rehabilitation credits and deductions: Certain tax incentives exist for expenses related to rehabilitating historic properties or making accessibility improvements for individuals with disabilities.
25. Energy-efficient home improvements credits: Tax credits can be claimed for making energy-efficient home improvements like installing solar panels or energy-saving appliances.
26. Adoption tax credit or exclusion: Families who adopt a child may qualify for a tax credit or exclusion of certain adoption-related expenses from their taxable income.
27.Earned Income Tax Credit (EITC): Designed to help low- to moderate-income earners, the EITC is a refundable tax credit based on income and family size.
28.Child Tax Credit (CTC): A non-refundable tax credit available to parents/guardians that provides a reduction in federal taxes owed per qualifying child under the age of 17 at the end of the year.
29.American Opportunity Credit (AOC): A partially refundable tax credit aimed at helping students and families offset qualified education expenses incurred during higher education studies.
30.Lifetime Learning Credit (LLC): Another non-refundable tax credit that helps cover higher education costs such as tuition fees and required course materials/expenses but is not limited by number of years in school like the AOC.
Understanding these various sources of taxable income can help individuals make informed decisions about their finances, plan their taxes more effectively, and potentially minimize their overall tax liability.