What is Taxable Income?
Understanding Taxes and Taxable Income
Taxes are one of the most important aspects of managing your finances. Knowing what is considered taxable income, and when and how much you need to pay in taxes, is vital for responsibly managing investments and ensuring financial well-being. In this article, we will look at taxable income in greater detail, discuss the various types of taxable income, and explain the tax implications of each type.
Definition of Taxable Income
Taxable income is defined as income from any source that is subject to taxation by the federal, state, or local governments. It is important to understand that not all income is taxable income and it is the difference between this taxable income and your overall total income that goes on your tax return. Generally, taxable income includes money earned through wages, salaries, tips, commissions, investments, and any other form of income that can be taxed.
Types of Taxable Income
- Income From Employment: Wages, Salaries, and Tips
This is the most common type of taxable income. Income from employment includes wages, salaries, bonuses, tips, and any other form of payment received by an individual during their employment. This type of income is subject to Federal, state and local taxes, as well as Social Security and Medicare taxes.
- Self-Employment Income
Self-employment income is income earned by an individual who works for themselves and not for an employer. This type of taxable income is subject to self-employment taxes and is reported on Schedule C of the tax return. It is possible to deduct certain business expenses from self-employment income including travel, office equipment, and more, as long as the deduction is considered necessary to the running of the business.
- Investment Income
Income from investments such as interest, capital gains, dividends, and other distributions from investments are also considered taxable income. This type of income is generally subject to Federal and state taxes, as well as certain investment fees and taxes. It is important to be aware of the tax implications of each type of investment before investing.
- Retirement Income
Retirement income includes income received from Social Security, pensions, and any other retirement plans. Generally, Social Security retirement benefits are exempt from Federal taxes, however, up to 85% of the income is subject to taxation by the state. Taxation of other forms of retirement income will depend on how the income was taxed when it was contributed.
- Rental Income
Rental income, or income from renting out a residence, is also considered a form of taxable income. There may be certain deductions available for rental income, such as depreciation and maintenance costs, and you should consult with a tax professional about the tax implications of rental income and deductions.
- Miscellaneous Income
Miscellaneous income includes income from alimony, prizes and awards, gambling winnings, health insurance reimbursements, and more. All of these are considered taxable income and are subject to Federal and state taxes.
Tax Implications of Taxable Income
As we have seen, there are various types of taxable income and each type is subject to different tax rules. Depending on your specific situation, it is important to understand the tax implications of each type of income when filing your tax return. It is imperative to pay your taxes on time, and to be aware of the fine details of the tax code.
Taxable income is income from any source that is subject to taxation by the federal, state, or local governments. Taxable income includes income from employment, self-employment, investments, retirement, rental income, and miscellaneous income. It is important to understand the tax implications of each type of taxable income before filing your tax return and to be aware of the various deductions that may be eligible for each type.
