Although our tax system can be complex in some situations, it can also be quite straightforward. You are liable for taxes on your taxable income, and how much you owe is based on the kind of income you have. Most income is taxable income, but there is non-taxable income as well. We’ll take a look at some examples of both types of income.
Taxable Income
There are many types of taxable income. The income you earn from working as an employee is taxable, as well as the income you earn when you are self-employed and as a business owner.
You are supposed to report income from wages, fees, commissions, tips, stock option, and even fringe benefits on your tax return. The fringe benefits you receive, even if you don’t receive cash, are taxable as income. In addition, even if fringe benefits are given to or used by someone else, you may still be considered the recipient and liable for the tax.
Investment income is also considered taxable. This includes income from the sale of investments which is subject to capital gains tax. You also pay taxes on income from interest earned on deposits, as well as from dividends paid out. Gains on collectibles sold (which includes physical metals) are also reported as taxable income.
You are obligated to report and be liable for taxes on income from royalties. This includes royalties from copyrights, patents, and properties that produce mineral, oil, and gas.
You are also responsible for taxes on bartering income. You will need to figure your gain for what you received in barter, although you can offset the income with the bartering services expenses or other items you provided.
Non-Taxable Income
There are a few income sources that aren’t taxable. Selective disability insurance payments: While payments from a policy paid for by your employer are taxable, you don’t have to pay taxes on payments when you receive them from a plan if you pay for it with after-tax dollars.
You don’t have to pay income taxes when you receive a gift. Taxes on gifts are paid by the giver – although the giver doesn’t have to pay taxes until the gift exceeds the exemption amount. This is different from a prize; you are liable for taxes when you win a prize.
In addition, you don’t pay taxes when you are the beneficiary of a life insurance policy.
When you invest in municipal bonds, they are most often tax-free at the federal level – and sometimes at the state level (if you live in the state of issuance).
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