What Kind Of Income Is Taxable?

Back in the day, kids would set up shop outside their homes and sell lemonade to boost their allowance money. Even into adulthood, the desire to earn extra cash is a feeling that hasn’t faded.

While the IRS doesn’t mind when the neighborhood kids cash in on their small shops, the same doesn’t apply to adults. If you’ve made extra cash one way or another, it’s important to know whether that income is taxable. If you’re scratching your head, wondering whether the money you received will be taxed, this blog post is for you.

What is income tax?

Income taxes are taxes that are levied on individuals or entities that receive income. The types of income that are subject to income taxes vary by jurisdiction, but most forms of income are taxable.

Some common types of income that are typically subject to income taxes include:

Wages and salaries. This is the income that individuals earn from their employment. It includes the money they earn from working and any bonuses, commissions, and other forms of compensation they receive.
Interest and dividends. This is the income that individuals earn from their investments. It includes the interest they earn on their savings accounts, money market accounts, certificates of deposit, and other interest-bearing accounts. It also includes the dividends that they earn from stocks, mutual funds, and other investments.
Rental income. This is the income that individuals earn from renting out property. It includes the money that they receive from renting out their homes, apartments, vacation homes, and other types of property.
Business income. This is the income that individuals earn from their businesses. It includes the money they earn from selling goods or services and any profits they earn from their businesses.
Capital gains. This is the income that individuals earn from the sale of capital assets, such as stocks, real estate, and other investments. It includes the profit they earn from selling these assets for more than they paid.

In addition to these common types of income, some other forms of income may be subject to income taxes, depending on the jurisdiction. For example, some jurisdictions tax social security benefits, unemployment benefits, and other forms of government assistance.

What are the income tax rates?

It is important to note that not all types of income are subject to the same tax rates. In most cases, the tax rate that applies to a particular type of income depends on the individual's tax bracket and other factors, such as the amount of income they earn and their filing status.

In general, the tax rates for income can range from 10% to 37%, depending on the individual's tax bracket. However, some types of income, such as capital gains, may be subject to different tax rates. For example, in the United States, capital gains are typically taxed at a lower rate than other forms of income.

Income tax brackets are used to determine the tax rate an individual or entity will be subject to based on their income. Tax brackets are typically set up as a progressive tax system, meaning that as an individual or entity's income increases, the tax rate they are subject to increases.

For example, in the United States, the tax brackets for individuals for the 2022 tax year are as follows:

Taxable income: Up to $10,275. Tax rate: 10%
Taxable income: $10,276 to $41,775. Tax rate: 12%
Taxable income: $41,776 to $89,075. Tax rate: 22%
Taxable income: $89,076 to $170,050. Tax rate: 24%
Taxable income: $170,051 to $215,950. Tax rate: 32%
Taxable income: $215,951 to $539,900. Tax rate: 35%
Taxable income: Over $539,900. Tax rate: 37%

In addition to the tax brackets for individuals, there are also tax brackets for married couples filing jointly, as well as for heads of household and for those who are considered unmarried individuals.

What income is not taxed?

In the United States, certain types of income are not taxed by the Internal Revenue Service (IRS). Here is a brief overview of some of the most common types of untaxed income:

Gifts and inheritances: Money or property received as a gift or inheritance is typically not taxed. However, there are some exceptions to this rule. For example, if you receive a gift of cash or other assets, and the total value exceeds the annual gift tax exclusion (currently $15,000 per person), you may be required to pay taxes on the amount above the exclusion limit.
Child support payments: Child support payments are not considered taxable income and do not have to be reported to the IRS.
Life insurance proceeds: Proceeds from a life insurance policy are typically not taxed as long as the payments are made to a beneficiary due to the insured person's death.
Social security benefits: In most cases, social security benefits are not taxed, although there are some circumstances in which some benefits may be subject to taxes.
Certain types of investments: Certain investments, such as municipal bonds and annuities, may be exempt from federal income taxes.
Some education benefits: Benefits from an education assistance program that do not exceed certain limits, such as the tuition and fees deduction and the American opportunity credit, are not taxed.

It's important to note that state and local taxes may still apply to some of these types of income. Additionally, it is always a good idea to consult a tax professional for personalized advice on what types of income may be taxed or exempt from taxes.

How can Taxfyle help?

Regardless of how much money you made, you will need to understand how it impacts your taxes. That means devoting much of your time to understanding the nuances of taxes and the different types of income you received. But there’s an easy way out.

At Taxfyle, we connect you to a CPA or EA expert in all things tax. When you file your taxes with us, you have the satisfaction of knowing your taxes are filed correctly and on time by a tax professional. That way, you can focus on what matters most: yourself.

This tax season, don’t be stressed. File with a Pro.