Taxable and non-taxable income

Source: globaltaxback.co.uk


Taxable income is the summation of earned income and unearned income, which creates a potential tax liability. The total amount of income or gross income is used to calculate how much the person or the corporation owes a fixed tax amount to the government. One important thing to remember about taxable income is that it includes not just one’s salary but also compensation in other forms, such as tips, bonuses, allowances, commissions, and capital gains.



Types of taxable income


Employee benefits and rewards

These were the most common kinds of taxable earnings. Employee wages and other fringe benefits are subject to payroll tax rates and are included in this group.


Business and Investment Income

Self-employed people are also subject to tax liability, specifically through their business’ income. For example, net rental income and partnership income qualify as taxable income. Generally, if your primary objective is income or benefit, and you’re constantly and consistently involved in the rental operation, your rental operation is a corporation. Investment income is included in this category too. You’ll be taxed on dividends from stocks, stock sales, capital gains, and savings interest.


Miscellaneous taxable income

Some taxable income types don’t fit in the common categories, so the IRS groups them in a miscellaneous category. Examples of income in this group include canceled debts, some life insurance, death benefits and unemployment compensation.


Examples of taxable income:

  • Salary
  • Wages
  • Interest received from banks
  • Stock options
  • Dividends
  • Unemployment compensation
  • Notes received
  • Rents from personal property


How to Calculate Taxable Income

Your total taxable income relies on your tax deductions, filing status, and the standard deduction. Just know that your goal here is to reduce your tax bill with as many deductions as possible.


Take those steps to measure your taxable income once you have your calculator in place:

  • Identify your total taxable income for the year, including both income earned and income not earned.
  • Calculate your adjusted Gross Profit. The adjusted gross income is your annual gross revenue, and any adjustments (or tax deductions above the line) are subtracted
  • Subtract your reported gross income from any regular or itemized tax deductions.
  • Subtract any tax exemptions to which you are entitled, such as an exemption on dependents.
  • Once you deducted any adjustments to the tax form, deductions, and exemptions from your gross income, you arrived at your taxable income.


Non-taxable income

Non-taxable wages are salaries paid to an employee or individual with no withheld taxes (income, federal, state, etc.). Yet, most of the compensation you pay to your employee(s) are taxable.


Types of non-taxable income :

There are several non-taxable income groups. Despite the apparent non-taxable profits you earn, it will be expressed in the return of the paper. Here are some of the non-taxable revenues you need to know about.


  • Gifts
  • Disability wages
  • Insurance provided by the employer
  • Life insurance payouts
  • Child Care
  • Scholarship and financial aid


Gifts :

The giver, not the recipient, generally pays taxes on any gift. So any donation that an employer gives out is only taxable for the employer. Individuals can send each other a relatively large amount of money without paying taxes .employers can only give their workers non-taxable gifts of not more than $25. Notice that business rewards and compensation for profit-sharing are not considered benefits and are taxed at a higher rate than normal salaries.


Disability wages:

An employee deemed temporarily or permanently disabled can qualify for disability pay. In general, compensation for the illness fall beyond non-taxable income. And, if these disability benefits come from an insurance package that covers the employer’s premiums, then the money will be paid. Types of non-taxable disability benefits include workers’ compensation, private disability insurance, and supplemental insurance. However, the money is taxable if the employer funds an insurance policy. Also, any potential damages due to injury, sickness, or loss of function compensatory (not punitive) are not taxable.


Insurance provided by the employer

Any contributions made by an employer to the benefits of an employee (of any type) are not taxable because they are not considered part of the employee’s compensation. The same applies to any contribution taken by the employee against their savings account for wellness. If the insurance is offered by a third party or by a health reimbursement plan, this doesn’t matter — neither form of payment is taxable.


Life insurance payouts

Many life insurance plans might not be taxable due to someone’s death to pay out to a person. That’s not valid, though, if the strategy is cashed in. In this case, any amount the individual receives may be taxed, which is greater than the cost of the policy. This applies only to policies that are paid out when the policy is cashed out. Any policy which has been paid out because of death is a non-taxable amount.


Child Care 

The payments received by the parents to care for children in the homes are tax-free. Child support payments after a divorce are also non-taxable. Essentially, most government programs come into the non-taxable income group.


Scholarship and financial aid

As a student, you may obtain scholarships, financial assistance, work/study job assignments, and other payment forms via a university. Often this kind of income is non-taxable, but it depends on how the income is used. The money is not charged if used to pay tuition, fees, course supplies, or textbooks. However, if the funds are used to pay for the room and board, or paid to the student directly to use, then it’s taxable revenue.


If you are looking for an assistance related to tax filing, tax planning or investments, do get in touch with us. We assure you that we won’t disappoint you. To know more visit-UBOS (United Business Owners Solutions).

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