What is taxable income?
is the portion of income that is the subject of taxation according to the laws that determine what is income and the taxation rate for that income. Generally, taxable income refers to an individual’s (or corporation’s) gross income, adjusted for various deductions allowable by statute. The main questions put by most individuals in any jurisdiction are “what makes up my taxable income” and what tax rates should be applied such that I can work out my tax liability to the state. For example, suppose within a year, one person earned $100,000 from work, made $50,000 profit from selling stock, and won the lottery for $1,000,000. This person has, prima facie, an income of $1,150,000. However, some of this income may be taxed at a lower rate or perhaps not taxable at all. In most western countries, 100% of regular salary (above a certain threshold) is taxable and a portion of Capital Gain (ie profit from selling stock or real estate) is taxable.
As I reviewed a client’s tax return this week, the client commented that she wasn’t sure if her mother needed to file a tax return or not. She wasn’t sure just what was taxable and if a return was required. To answer the question of what is taxable, let’s first look at what is not taxable. Some common examples of items that are not taxable and included in your income are: • Economic Stimulus Payments received in 2008 or 2009 • Child support payments • Adoption expense reimbursements for qualifying expenses • Inheritances, gifts and bequests • Meals and lodging for the convenience of your employer • Welfare benefits • Cash rebates from a dealer or manufacturer • Workers’ compensation benefits • Unemployment benefits up to $2,400 in 2009 (sorry, its all taxable in 2008) • Deferred contributions to qualified retirement plans are not taxable until withdrawn in most cases • Health Savings Accounts (HSA) are often not taxable income if handled correctly Income may be taxable under certain ci
Taxable income includes salaries, wages, commissions, bonuses, incentive payments, fees, tips, vacation pay, honoraria, severance pay, profit distributions, sick pay (other than third party sick pay), net profits from a business and/or profession or farm, some rental income (taxable if rental income is your primary source of income), royalties, patents and fees, partnership or joint venture income, educational stipends, executor’s and director’s fees, taxes assumed by the employer for the employee, excess life insurance, exercised stock options from employers, deferred income for pensions and annuities, inactive military pay and other forms of compensation by the taxpayer, whether in cash or property. Anything included in the State Wage Figure from your W-2 form is considered taxable. Also taxable are Net Profits from the operation of a business, profession or other activity after provision for all costs and expenses incurred in the conduct of that business. You are permitted to deduct
