Taxable Income

The Difference Between Taxable Income and Nontaxable income

Income can be received in many different forms, for example through money, services, or property. The income can also be described as taxable income or nontaxable income.Generally speaking, a given amount included in an income is considered taxable unless the income is specifically given an exemption by the law. Taxable income must be reported on the IRS Federal income tax return and is subject by law to tax. Nontaxable income may still have to be shown on a tax return but is not subject to taxes. A complete list of what is considered taxable and nontaxable income can be found in the IRS Publication 525.

Types of Taxable and Nontaxable Income

Constructively-received income

• This is generally considered taxable income and is taxed based on the amount available, even if the money is currently not available, as long as it is before the tax year.Assignment of income

• Income given by an agent income constructively received during the year the agent received the money.

Prepaid income

• Example: compensation received for future services

• Generally included in the income during the year you received. With an accrual method of accounting, it can be deferred for services to be done prior to the end of next year. The payment is still considered a taxable income.

Employee Compensation

• Generally put into the gross income with salaries, wages, commissions, tips, and fees.

Childcare providers

• This is considered taxable income and a return must include the child’s home or place of business, and the pay received. Self-employed individuals must also include payments for services, Employment implies being subject to the will and controlled by the employer

• Babysitters who sit for family or neighbors are considered child care providers

Fringe Benefits

• Fringe benefits are from performance of services included in the income as compensation unless paid the fair market value by an employee or are specifically exempt by law.

• Refraining from the performance of services is considered the performance of services.
Business and Investment Income

• Rents from personal property: Reporting income from personal rentals are determined by

o If rental activity is a business

o If the rental activity is done for profit.

• If the main purpose is income or profit and is done with continuity and regularity, it is considered business and is taxable income.

Partnership Income

• A partnership is generally not a nontaxable. The income, losses, gains, credits, and deduction of a partnership are put through based on the partner's share of these items.

S Corporation Income

• An S corporation is generally a nontaxable income. The income, deductions, losses and credits are passed to the shareholders based on the pro rata share. The share is a taxable income and must be reported.

Royalties

• Royalties from patents, copyrights and oil, gas or mineral properties are considered taxable income.