According to a Federal Reserve study, most Americans earn money through multiple sources. These usually include W-2 earnings, unemployment benefits, investment dividends, retirement benefits, and more.
With multiple sources of income, it is no wonder that many taxpayers make mistakes when filing taxes. The most common one is filing taxes for the wrong income.
Essentially, you’d wish to know what income sources to include when filing taxes. Relax! We’ve got your back.
In this article, we’ll be giving you a ballpark idea about what does taxable income mean, along with the filing procedure, and some other information. So, keep reading, if these are the questions that come to your mind when thinking of income tax.
What is Taxable Income?
Did you know that not all of your income is taxable? Yes, a portion of your income is not included when calculating taxes, usually known as tax deductions.
This brings us to the question at hand- taxable income is the portion of your income that comes under tax laws, and is included when filing income tax.
To better understand this, you need to understand how income is defined and how taxes are calculated.
IRS Calculates Income Tax
IRS defines any debits into an account as income. In other words, regardless of where you receive money from in your account, it will be considered as income as per IRS. It also includes income in the form of assets, property, or services.
A lot many people often mistake their earned wages, compensations, and other sources of regular earning to be included in income tax. Well, truly speaking, this is not at all the right approach.
For the detailed information, “learn more about tax defense from Silver Tax Group”, you should know what to include and what not to when filing for your income tax.
This is not only true for earned wages and compensations but a lot of other income sources too.
Typically, IRS would collect taxes if your income falls under any of the following types:
- Canceled or Forgiven Debt
- Dividends on Investment
- Real Estate Gains
- Rental Income
- Copyright and Patent Royalties
- Stock Options
- Unemployment Benefits
- Other Support Benefits
- Virtual Currency Gains
Apart from these, if you win any assets or money from gambling or lottery, it must also be included in your income tax report.
How to File Your Income Tax?
By now, I would have a ballpark idea about what income you should include when filing for taxes. However, you’d still need to understand the filing procedure. Perhaps, we can offer you a rough outline for the same too.
Calculating your taxes is a never-ending process. Year-round, you need to keep an eye on what money is coming into your account, where it is coming from, and what should be included in income tax returns.
Taxes on different income categories are calculated differently. It is better to work with an accounting attorney to get a better idea about it.
Besides, calculating your taxable income, you also need to calculate the deductions to be made. As already mentioned, not all income is taxable.
Usually, retirement income, student loans, charities, and freelance expenses are not included in tax calculations.
When filing income tax, including the right income and deducting only what’s necessary can save you from IRS troubles, in the long run. That being said, since tax laws are quite complex, it is better to work with a tax attorney you can rely on.