Types of Income
The IRS lists 22 different types of income that an individual taxpayer potentially needs to report on their Form 1040. This article explains some of the more frequently reported types.
Some Commonly Reported Types of Income (A-Z order)
Business income (payments that a taxpayer receives from selling products or services) must be included in income. A payment in the form of property or services is included in income at fair market value.
Capital gain or capital loss occurs if the taxpayer sells a capital asset, and calculates the difference between the assets adjusted basis and the amount realized on the sale. Most items owned and used for personal or investment purposes, including homes, furnishings, and stocks and bonds, are capital assets. A capital gain or loss is either long-term (held for more than one year) or short-term (held for one year or less).
Cash, property, or services that the taxpayer receives for the use of real or personal property are included as rental income, although the expenses of renting the property are generally deductible.
Dividends that a corporation pays a shareholder in cash or other property is included in the shareholder's income. Additional dividends may result if the corporation pays a shareholder's debt, provides services to a shareholder, or allows a shareholder to use corporate property. The corporation provides dividend information on Form 1099-DIV.
Interest that must be reported includes interest on bank accounts, money market accounts, and certificates of deposit (CDs); interest from Treasury bills, notes, and bonds; some types of savings bond interest; and, possibly, part of the original issue discount (OID) on a bond or note originally issued at a discount. These amounts are provided to the taxpayer on Forms 1099-INT and 1099-OID.
Pension or annuity payments from qualified retirement plans may be incredible in income.
Scholarships, fellowship grants, and other grants are tax-free if: (1) the recipient is a candidate for a degree at an educational institution with a regular faculty, regular curriculum, and a regularly enrolled student body, and (2) the recipient uses the amounts received for tuition, fees, or required supplies and equipment. Otherwise, the amounts received may be taxable.
Some unemployment benefits, including state unemployment insurance benefits, Federal Unemployment Trust Fund benefits, and railroad unemployment compensation benefits, are included in income.
Wages and salaries, which are amounts that the taxpayer receives for working as an employee, are included in gross income. The wage and salary incomes that must be reported are usually shown on a W-2 form that the employer provides to the employee.
Other Types of Included Income
A taxpayer may also need to report lump-sum distributions, retirement plan rollovers, farming and fishing income, clergy earnings, gambling income, bartering income, Social Security and railroad retirement benefits, certain deferred wages under a 401(k) plan, income from passive activities, stock options, income from a trading business, stock received in a demutualization, and debt cancellation income.