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12 Types of Income You Must Pay Taxes on — and 5 the IRS Can’t Touch
These days, there are about a million ways to earn money beyond your boring 9-to-5 job.
You’re already familiar with the oodles of side gigs that could help you earn a little extra cash each month. You could swallow swords, dress up like Batman, clean up after rowdy house parties — the list goes on and on.
Come tax season, this can get confusing. You might find yourself wondering what the heck is actually taxable.
As it turns out, the IRS has basically thought of everything. There are tons of quirky rules about what the IRS considers taxable income and what it doesn’t.
“Unfortunately, the IRS views almost all money received by taxpayers as taxable income,” said Aaron Lesher, a CPA with Hurdlr. “The IRS even lists income from criminal activity as technically taxable, although if you’re making a living from criminal activity, you’re probably not too worried about that.”
More on that later.
We chatted with tax experts to tackle this complex question and compiled this list of obvious and not-so-obvious taxable income sources you should know about.
For a full list of what the IRS considers taxable versus nontaxable income, take a peek at its handy 39-page guide explaining all of the applicable tax rules for preparing your 2016 return.
What Does the IRS Actually Consider Taxable Income?
OK, let’s start with the basics. Here are the things you must report to the IRS as taxable income this spring.
1. Your Salary
This one is the type of income most people are familiar with. If you get a steady paycheck from an employer, you need to report this income to the IRS. Your salary also includes bonuses and commissions.
That’s right. Waitresses, waiters, bartenders and other folks who work for tips must report them as income to the IRS. This includes cash tips.
“All income must be reported, even if it’s not deposited into the bank. And yes, the IRS and state (government) have ways of figuring out that there may be unreported income,” said Abby Eisenkraft, an IRS enrolled agent, accredited tax adviser and tax preparer, retirement planning counselor and the author of “101 Ways to Stay Off the IRS Radar.”
3. Freelance Income
You should treat freelance income just like you’d treat your regular salary. Even if you don’t receive a 1099-MISC from the company you worked for, it doesn’t matter, according to Eisenkraft.
“All income gets reported, whether or not a reporting document is received,” she said.
4. Worldwide Income
Let’s say you live in the United States but earn income from a company based overseas. Even if you don’t receive a W-2 or 1099 from the overseas company, the IRS wants to know about this income.
“If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S,” according to the IRS website.
Sure, bartering doesn’t feel like money in your pocket. But if you trade a product or a service for something that has value, the IRS considers this income, said Eisenkraft. The rules and procedures for reporting bartering income depend on the type of bartering that takes place, so if you’re big into making trades, the IRS spells out all of the details on its Bartering Tax Center website.
6. Gambling Winnings
If you like to bet on horses or play the slots, keep reading. Your winnings are “fully taxable,” and you must report them on your tax return, according to the IRS.
“Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips,” according to the IRS website.
Good news, though: You can also deduct your gambling losses.
7. Jury Duty Pay
If you served on a jury and got paid for your time, the IRS wants to know how much money you earned. Any reimbursements you receive for mileage or food does not count as income, says the IRS, and sometimes you can deduct jury duty pay.
“If you turn over your jury duty pay to your employer in exchange for continuing to receive salary pay you can deduct that amount,” said Josh Zimmelman, owner of Westwood Tax & Consulting in New York.
8. Hobby Income
Even if your love of buying and selling old stuff is just a hobby, you have to tell the IRS if you make any money antiquing. You are able to deduct any “ordinary and necessary” expenses up to the amount of the hobby income you earned.
9. Illegal Activity
This one is a head-scratcher. If you earn income from illegal activities, “such as money from dealing illegal drugs,” the IRS says you must report it.
Speaking of stuff that’s illegal, the IRS also says you must report any bribes you receive as income. There are also separate sections about stolen property and kickbacks — you need to report these, too.
11. Canceled debts
If creditors forgive some or all of your debt, the IRS considers this income. There are some exceptions to this rule, such as debt canceled as a gift or inheritance and student loan debt forgiven under certain programs.
You can view the full list of exceptions (it’s a long one!) on the IRS website. Debt forgiveness is a complex topic, so be sure to go over your specific situation with a tax expert.
If you receive alimony (court-ordered payments from one spouse to another) after a divorce, you have to report it as income, according to the IRS.
What the IRS Considers Nontaxable Income
Here’s where things start to get interesting. There are also dozens of things the IRS does not need you to report as income. Again, it’s a long list, so be sure to visit the IRS’s official tax guide before filing your taxes this year.
1. Olympic Medals and Other Winnings
Thanks to a new bill signed into law by President Barack Obama last fall, you won’t have to pay income tax if you win an Olympic or Paralympic medal and the associated prize money if you made less than $1 million that year. In the past, athletes were subject to a “victory tax” on their winnings, which were $25,000 for a gold medal, $15,000 for a silver and $10,000 for a bronze. The IRS still wants you to report this income; it just won’t tax you on it.
2. Child Support
Divorce has confusing tax implications. As we mentioned above, the IRS considers alimony income, but child support payments are nontaxable income.
3. Carpool money
If you’re a regular driver in a carpool, the IRS does not consider any money you get from your passengers as income, unless you started a legit, for-profit carpooling business. The IRS considers these payments reimbursement for your expenses.
4. Holocaust Victim Restitution
The IRS does not consider restitution payments to Holocaust victims or their heirs taxable income. This also includes European insurance payouts made as a result of World War II.
5. Holiday Food Gifts
The IRS sees a difference between a Christmas cash bonus and other gifts you might receive from your employer. “If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income,” according to the IRS.
Our list isn’t exhaustive by any means, but it should give you a good sense of how the IRS views your money. If you’re earning income that we haven’t covered here, be sure to consult with a tax expert or the IRS directly.
Your Turn: What are the weirdest ways you made money this year?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.