What is Income?

Generally speaking, income is financial gain derived from labor (work), capital (money) or a combination of the two. Unless specifically exempt or excluded by law, all income is subject to income tax and is reported on the tax return.

Gross income is total worldwide income received in the form of money, property, or services that is subject to the tax. There are two types of gross income:

• Earned income is received for services performed. Some examples are wages, commissions, tips, and generally, farming and other business income.
• Unearned income is taxable income that does not meet the definition of earned income. It includes money received for the investment of money or other property, such as interest, dividends, and royalties. It also includes pension, alimony, unemployment compensation, and other income that is not from performing service.

Non taxable income is by law exempt from tax. Exempt income includes child support, municipal bond interest, welfare benefits, VA benefits, various military allowances, workers' compensation, gifts, and life insurance proceeds paid to the death of the insured.

Gross Income

There are two aspects to determining gross income:

1. Who owns the income, and
2. What income should be reported on a tax return.

Ownership of income is determined by state law. The laws regarding the ownership of income and property in most states are based on British common law. These states are called separate property states. In separate property states, income belongs to the person who earned it or who owns the property that produced the income.

Nine states are community property states. With the exception of Wisconsin, the laws of community property states are based on Spanish civil law. Generally, in community property states, income received by a married couple for services performed is considered to belong half to the husband and half to the wife regardless of which of them earned the income. The laws regarding the ownership of income from property vary among these states. The nine community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, ownership of the income of a married couple needs to be determined only if they file separate returns.

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Unearned Income

Unearned Income - An individual's income derived from means other than the provision of personal efforts (Salaries), such as that derived as dividend, interest, or rent. Pensions and royalties, however, are not considered unearned income.

Examples of unearned income include interest from a saving account, bond interest, tips, alimony, and dividends from stock. As long as this income is "realized" then it is taxable.

Interest

Interest is money paid or received for the use of money. Banks pay interest on money their customers deposit; governments and corporations pay interest on bonds they issue; insurance companies pay interest on money left on deposit. The sources of interest income are almost unlimited. Most of the interest we received is taxable, but some is not. See  Form 1099-INT.

Payers of interest of $10 or more to any one person during the year generally required to report such payments to the IRS and furnish the recipient with a statement of total interest received for the tax year. If less than $10 interest was received from any payer, that interest is also taxable to the taxpayer, even though a reporting form is not required from the payer. In some cases, especially with loans or contracts, the taxpayer must determine the amount received from his own records (for example, from an amortization schedule).

When the taxpayer receives taxable interest totaling more than $400, it must be listed on either Form 1040A, Schedule 1, or Form 1040, Schedule B. Interest totaling $400 or less can be listed in the Interest Income section of the Income Compilation Worksheet.

If a taxpayer sells his home to a buyer who uses the home as his residence, and the seller finances part or all of the mortgage, the seller must report the interest he receives each year on Schedule B, Form 1040, or Schedule 1, Form 1040A. Additionally, the seller must report the buyer's name, address, and social security number on Schedule B or Schedule 1. The seller is also required to provide the buyer with his name, address, and social security number.