We start our discussion on income with the definition of income. Income is the consumption and savings opportunity gained by an entity within a specified timeframe, and is generally expressed in monetary terms. There is a different definition of income for households and individuals. Income in that sense would be “the sum of all wages, salaries, profits, interest payments, rents and other forms of earnings received in a given period of time.” In 26 USC §61, defines income an “except otherwise provided in this subtitle gross income means all income from whatever source derived, including but not limited to:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from businesses;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments
(9) Annuities;
(10) Income from life insurance and endowment contracts
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership income
(14) Income in respect to the decedent; and
(15) Income from the interest in an estate or trust.”
That is how the Internal Revenue Service defines income.
The most common income source is Earned Income. We will discuss that tomorrow.
The other most common form of income that people earn is interest and dividends. Interest and dividends are defined as portfolio income by the IRS. Interest is generally earned either from a deposit in a bank, or by other means. Dividends are distributions of profits by a corporation to its shareholders. Interest income is typically money that the bank pays you to borrow your money. Get this; interest income also includes any gift that you are given by a financial institution to open an account. So that toaster they gave you to open your bank account is taxable to you. We will go into depth more on portfolio income on Wednesday.
Other forms of income include: retirement income, Pensions, withdrawals from retirement accounts, Social Security, all of which are taxable, but are not earned income. Royalties that you receive, rents, certain annuities, income you earn while you are dead; all taxable all non-earned income.
Did you settle with a credit card company? The amount of debt that was wiped out is taxable. Did someone die and leave you an interest in their estate or a trust; that is taxable as well. Get a divorce, and have a good attorney stick it to that no good SOB and made them pay alimony; well that is taxable too.
I was just having some fun at the IRS’s expense. There are many types of income, and unless it is Tuesday and it is raining; most of it is taxable.
This is the basis of what our discussion will be this week. I hope you enjoy it!
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle, The Complete Guide to Estate, Gift and Trust Taxation, available on Nook and Kindle, and The Complete Guide to Hiring an Accountant, available on Nook and Kindle.
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