Taxpayers often cite a lack of awareness as the main reason for not paying taxes. When the time arrives, many taxpayers find themselves at a loss about their taxable incomes. While it’s best to leave it to the courts to decide whether the person claiming negligence is telling the truth or not, our focus should be on avoiding being under the radar. Therefore, in this two-part series, “What’s Your Income Type – Taxable or Nontaxable?”, we will cover some of the most common taxable and nontaxable income types. Let’s take a look.
Taxable Income Types
Everything that you receive in return for the services that you provide for work should be included in your gross income. This includes not only the regular compensations such as salaries, wages, commissions, and tips but also any stock options or fringe benefits as well.
All fringe benefits that you receive in return for the services you perform should be part of your income at the time of filing returns. For example, if your employer gives you a car for your family to use, it should be included in your tax return as a fringe benefit. Since you are the recipient of the car, not your family members, the benefit will be reported as income to you. Remember that it is not necessary that you be an employee of a company to receive fringe benefits. You can receive these benefits even if you are a director or partner of an organization.
In simple words, bartering is about exchanging goods or services. The IRS requires all the bartering transactions to be reported at the time of tax filing as taxable income. The parties involved in bartering must report the fair market value of the product or service they receive. The taxes will be applicable in the year bartering takes place.
Just Like ordinary income, Royalties that individuals or companies receive in the form of patents, copyrights, oil, gas and mineral properties are subject to tax. Income is reported in Part I of Schedule E (Form 1040). If you are a self-employed inventor, writer, artist, or hold an operating oil, gas or mineral interest, all income and expenses must be reported on Schedule C or Schedule C-EZ,
Bitcoin and other virtual currency are taxable according to the guidelines issued by the IRS. Individuals and businesses using virtual currencies as a mode of payment for goods or services, or holding them for the purpose of investment need to carry the tax liability associated with these transactions.
The Way Forward
Keeping in mind the taxable income types discussed in this post can help you accurately file your tax returns and avoid being penalized by the IRS. In Part 2 of this blog, we will delve into various income types that are specifically excluded by law and considered nontaxable.