Taxable income is the portion of your total income that is subject to taxes by the federal, state, or local government. Understanding what counts as taxable income is crucial for effective tax planning and ensuring you comply with tax laws.
Below, we break down the common types of taxable income and provide relatable examples to help you grasp this important personal finance concept.
Types of Taxable Income
Taxable income comes in many forms. While wages and salaries are the most obvious, there are other sources of income that you might not immediately think of as taxable. Let’s dive into some common examples:
Wages and Salaries
The most familiar form of taxable income is what you earn from your job. This includes:
- Hourly wages
- Salaries
- Bonuses
- Commissions
If you’re employed, your employer typically withholds federal and state taxes from your paycheck.
Interest on Savings
Interest earned on savings accounts is considered taxable income. For example:
- If you earn $50 in interest from a high-yield savings account, you’ll need to report it when filing your taxes.
This is usually reported to you and the IRS via Form 1099-INT.
Stock Dividends
When you own stocks that pay dividends, those payments are taxable. There are two types of dividends:
- Qualified dividends: Taxed at lower, long-term capital gains rates.
- Ordinary dividends: Taxed as regular income.
For example, if you receive $500 in dividends from your investment in $VOO, that amount is taxable.
Profits from Selling Assets
Whether it’s stocks, Bitcoin, or even a collectible, profits from selling assets are taxable. These profits are called capital gains and are categorized as:
- Short-term capital gains: From assets held less than a year, taxed as regular income.
- Long-term capital gains: From assets held for more than a year, taxed at lower rates.
For instance, if you bought Bitcoin for $10,000 and sold it for $15,000, the $5,000 profit is taxable.
Business Income
If you’re self-employed or run a side hustle, the income you earn is taxable. This includes money from freelancing, consulting, or selling products online. You can deduct certain business expenses, which reduces your taxable income.
Rental Income
If you rent out property, the money you receive from tenants counts as taxable income. However, you can deduct expenses like repairs, property taxes, and mortgage interest.
Retirement Income
Certain types of retirement income are taxable, including:e
- Withdrawals from traditional 401(k) plans or IRAs
- Social Security benefits (depending on your overall income)
For example, if you withdraw $20,000 from your 401(k), that amount is typically taxable.
Unemployment Benefits
Yes, unemployment compensation is considered taxable income. If you received unemployment benefits during the year, you’ll need to report them on your tax return.
What Is Not Taxable?
While the above sources are taxable, some forms of income are not. These include:
- Life insurance payouts
- Gifts and inheritances (in most cases)
- Certain scholarships or grants
- Municipal bond interest
Understanding the difference between taxable and non-taxable income can help you make better financial decisions and minimize your tax liability.
Final Thoughts
Knowing what qualifies as taxable income is an essential part of personal finance. By staying informed, you can better plan for your taxes and avoid surprises when filing your return. Always keep track of your income sources, and don’t hesitate to consult a tax professional for personalized advice.
Winchell House 
You must be logged in to post a comment.