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What is Considered Taxable and Non-Cash Taxable Income?

In its simplest definition, "income" is money (cash) received and often earned through employment or investing. With that said, when it comes to the IRS definition of "income", they have a much broader interpretation. Not only is the government interested in money received as payment but also other forms of compensation.

As such, it is the taxpayer’s responsibility to pay tax on the fair market value of either the goods or services received. Understanding the difference between taxable and nontaxable income can be confusing during tax season. Most wages, salaries, tips, and other forms of income are taxable.

Nontaxable income tends to come in the form of benefits, rebates, and inheritances. For example, child support income, welfare benefits, healthcare benefits, and gifts tend to be forms of nontaxable income. If you have received a rebate from the purchase of a car or other product, the rebate may be a form of nontaxable income. Rebates and cash back bonuses aren't taxable if it is considered a reduction to the original purchase price, in other words a discount. However, in certain situations rebates are considered to be gifts and in this case, they are taxable.

Taxable income also applies to all gifting, bequests and inheritances of either cash or property. The first $14,000 (per recipient) of a cash gift does not incur any tax at the present time.

Taxes on Employee Benefits

Income tax also applies to company perks or benefits. Often, companies offer benefits to attract the best employees (company cars, complementary meals, shuttling, lodging, etc). Any perk given to an employee is considered by the government income and is taxable.

As for more traditional taxable income such as wages, salaries and tips, most often this is recorded on the taxpayers W-2(s) and will be entered on line 7 of a 1040. Outside of income reported on a W-2, there is also income reported on a 1099-div and 1099-int. This can include among other things interest, dividends, refunds, credits, alimony, capital gains, retirement/pension/annuity distributions, unemployment and social security benefits.

The Internal Revenue Service (IRS) asks that all taxpayers calculate investment income separately from employment income. Investment income is defined as any money made from interest, capital gains, dividends or the sale of assets, such as real estate or securities.

To calculate investment income, all you have to do is find the sum of the following:

  • Profit from selling stocks, bonds and mutual funds
  • Capital gains from mutual funds
  • Profit from the sale of real estate that does not serve as a primary residence
  • Profit from the sale of private companies or S corporations
  • Taxpayers may also be eligible to defer taxes on the interest of some investments as well. Instead of paying taxes on the interest as they earn it, they pay when the investment reaches maturity which can be beneficial to many taxpayers. For more on this see Taxes on Interest.

Foreign income is money that is earned in other countries. This income should be declared alongside all income earned in the United States on your 1040 form. Foreign income may be eligible for the Foreign Tax Credit. With this credit, some of your foreign income may not be taxed if it is properly taxed by the country where it was earned. This credit cannot be used when you itemize your foreign income. You may be able to exclude some foreign income with special exclusion rules based on how much you earned, where you earned it and how you earned it.

A 1099-misc tax form is designed for independent contractors as opposed to regular employees. If you work as an independent contractor and earn more than $600 from a given payer during a tax year, then you should receive a 1099 tax form from them If you receive this form and fail to file it correctly, you can be penalized by the IRS.

This penalty will vary based on how much money you earned during the tax year. The IRS looks at your overall tax liability, which refers to the amount of taxable income you receive in a year. Therefore, when you fail to file your 1099 accurately, you can be penalized up to 20 percent of your underpayment. That means if you fail to report $1,000 on your 1099, you may be penalized up to $200.

On the other hand, payers can also be penalized for not using a 1099-misc correctly. If a business does not issue a 1099-misc for an independent contractor who earns at least $600 throughout the year, then you can be fined anywhere from $30 to $100 per form with a maximum penalty of $500,000 per year. Even if a contractor does not provide a 1099-misc form, they are still responsible for reporting any income over $600 to the IRS.

Taxable income covers that which has been mentioned above and much more. When it comes to filing any benefit, cash equivalent or other, is considered to be taxable and the responsibility of the filer to report it.