According to the IRS, you must report your worldwide income on your tax return. Income is not just about the salary that you received. It would also include a lot of items such as gains on the property you sold and net income from your business or rental properties.
The good news is that you don’t usually pay taxes on the gross income, the IRS provides various deductions to offset your earnings. For example, the IRS allows you to deduct certain expenses and personal exemptions. In addition, the IRS is also allowing you to exclude certain income as well.
So how would you know if the income is taxable or not? Is there such a standard rule to follow? Well, the rule is it is taxable whenever the IRS says it is. We have already talk about a few of the income that are not taxable.
Below are the 10 income subject to tax that you may not be aware of:
1. Barter Income
Bartering is an exchange of property or services. Yes, this type of exchange was very much prevalent back in the old times but this could still happen nowadays. If you think that you can avoid taxes by not taking cash for the services you have provided, think again! The IRS says that barter income is also taxable.
- Example: You are a plumber and you live in an apartment where you pay a monthly rent of $1,000 for a single bedroom. Your next door neighbors have multiple plumbing problems and you offered to your apartment manager that you will fix the plumbing accident in exchange for a reduction on your monthly rent. The fair market value of your services is $600 and for your next month’s rent, you only paid $400.
- How to Report It – In these cases, your landlord will have to send you a 1099-B Proceeds from Broker and Barter exchange Transaction or a similar declaration. You have to report the $600 as income on your tax return. The income must be reported on Schedule C - Profit or Loss from Business of your form 1040.
2. Canceled Debt
If you think that you are off the hook just because you have settled your debt from your creditor at a much smaller amount, think again! Debts that are forgiven or canceled are included in your taxable income. The creditors would normally settle the amount because they much rather get something instead of nothing. On the other hand, the creditors can report bad debt as tax deductible on their return.
- Example: You have not been able to make the payments on your $10,000 credit card debt but you were able to negotiate a settlement were you would only pay $2,000, which is 20% of your debt. The $8,000 will be considered as debt forgiven or canceled and will be added to your income. Special cases apply if you are filing for bankruptcy, if you are foreclosing your home or if forgiven debt is exempted per the IRS (such as for a student loan for non-profit/government employees or government housing down payment assistance). Please consult an attorney or a tax professional for this special cases.
- How to Report: Usually, you will receive a 1099-C, Cancellation of Debt from the creditor. If the debt is for your personal use, the canceled debt is reported on Form 1040, line 21 while business canceled debts will be reported on Schedule C-Profit or Loss from Business.
People often mixed up alimony from child support. If you receive cash or property as alimony, these are included in your taxable income. Any amount that pertains to child support are not taxable! On the other hand, the ex-spouse who pays the alimony will be able to deduct the amount attributed to alimony on his/her tax return.
- Example: Your ex-husband pays you $2,000 per month. Per your divorce decree, $600 of those is attributed to child support while the remaining $1,400 is for alimony. You must include the $1,400 alimony as income on your tax return. On the other hand, your ex-husband can deduct the $1,400 on his tax return as well (but not the $600).
- How to Report: You must report the alimony income on Form 1040, line 11.
4. Scholarships and fellowship used other than for tuition, books, fees
Just because you are receiving a scholarship or grants does not mean that these are not taxable. If you receive these types of payment and you use it to pay for any expenses other than for tuition, books, fees or equipment, you may need to include the amounts as taxable income. Examples of these expenses are any amounts use for living expenses such as payment towards room and board, meals, utilities, transportation, etc. In addition, if you receive grants as payment for your teaching services, you will need to include these amounts in your taxable income as well.
5. Life insurance proceeds for insurance policy you bought
In general, life insurance paid to a beneficiary because of the death of the insured person are not taxable. However, if you bought the policy from someone not related to you, the proceeds may be included in your taxable income.
6. Court awards for damages other than for personal injury and physical sickness
As discussed before, court awards for personal injury and physical sickness are not taxable to you. However, court awards other than the previous two are. Examples of taxable court awards are interest on any award, compensation for lost wages or lost profits, punitive damages, amounts received in settlement pension rights, attorneys fees, other legal expenses,, back pay and damages for patent infringement, breach of contract, or interference with business operations.
7. Bribes or Kickback
Bribes and Kickbacks are included in your taxable income.
8. Hobby Income
Income from your hobby or activity not for profit must be included in your income. If you are a stamp collector and you sold your collectible stamp at a profit, you must report the profit in your income. Since you are not running a business, you cannot deduct the expenses from your income and report only the net amount. Income must be reported on 1040, line 21 while you can only deduct expenses if you are itemizing your return (on your Schedule A). In addition, your can only deduct expenses up to the amount of your income.
9. Disability income when employer paid for the premium
In general, disability income that you paid the premium yourself are not taxable. However, if your employer paid for the premium or if the premium is part of the cafeteria plan where you received a tax benefit (premiums are deducted from your taxable income), you may have to report the disability income proceeds as taxable income.
10. Some Compensation from Employer Other than your salary
Compensation received other than your salary may be taxable to you as well. The following are the most common ones:
- Bonus and awards – receive for outstanding work must be reported as income in your taxes
- Severance Pay – must be reported in your income and any payment for the cancellation of employment contract
- Group Term Life Insurance – you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance
- Interest free loan from employer -the amount of the interest that you would have paid would be reported as your income.
- Tip Income – even if the tip income are not reported in your w-2, it is still must be included in your taxable income