When it comes to income, there are basically two different
types that you should be aware of: taxable income and non-taxable income. It is
important for you to understand which type of income you should declare as
taxable and which type you should declare as non-taxable. Making smart
decisions in this regard can help you to reduce your tax liability.
A good general rule of thumb to follow is that any income
that increases your wealth is considered to be taxable income. Also, understand
that most income does not fall under the non-taxable category. That doesn’t
necessarily mean, however, that you have no non-taxable income, and assuming
that and just declaring everything as taxable can end up hurting you in the
long run.
What is Non-Taxable Income?
As mentioned, there honestly isn’t a ton that is
non-taxable. However, some things that are typically going to be non-taxable
include:
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Inheritances
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Healthcare benefits (in most cases)
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Gifts
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Cash rebates
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Bequests
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Welfare payments
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Adoption reimbursements
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Money from a life insurance policy in the case
of a death (in some cases)
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Money from a qualified scholarship that is not
used for room and board
What is Taxable Income?
As mentioned, anything that increases your wealth or overall
“value,” monetarily speaking, is considered to be taxable income.
This can include things such as:
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Salaries
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Childcare fees
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Commissions
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Stock options, as well as their interests and
dividends
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Unemployment compensation
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Royalty payments
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Strike pay
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Income from rental properties
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Alimony
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Income from fringe benefits
Of course, as with all things, there are some “gray areas”
when it come to what is taxable and what is not.
For this reason, it is wise to have a tax/financial
professional who can assist you with fully understanding the difference between
the two types of income and helping you to make the best possible financial
decisions for yourself. While you can figure all of this out on your own, why
not make it easier and get professional assistance?