What Are Some Taxable Items According to the IRS?

The Internal Revenue Service (IRS) operates on a foundational principle outlined in the Internal Revenue Code: all income is subject to tax unless a specific provision in the law creates an exemption. This concept is formally expressed as “gross income means all income from whatever source derived.” Essentially, any economic gain or clear addition to a person’s wealth is presumed to be taxable income, which includes payments not just in cash but also in property or services. The responsibility falls on the taxpayer to demonstrate if a particular source of income is specifically excluded by law. Without a clear statutory exception, the IRS considers the amount received as part of gross income for calculating tax liability.

Earned and Business Income

Compensation received by an employee is a category of taxable income. This includes regular wages and salaries paid for services performed, which are reported on Form W-2, Wage and Tax Statement. Beyond a base salary, other payments from an employer are also taxable, including performance bonuses, sales commissions, and tips received from customers.

Certain non-cash benefits provided by an employer, known as fringe benefits, are also treated as taxable income. While some benefits, like health insurance contributions, are often exempt, many others are not. For example, the personal use of a company vehicle, employer-provided gym memberships, or educational assistance for courses that are not job-related can be considered taxable compensation. The fair market value of these benefits is calculated by the employer and added to the employee’s total earnings on their Form W-2.

Income from self-employment or the gig economy is fully taxable. This applies to earnings from freelance work, independent contracting, or operating a small business as a sole proprietor. Common forms for reporting this income include Form 1099-NEC, Nonemployee Compensation, and Form 1099-K, Payment Card and Third Party Network Transactions.

Self-employed individuals are responsible for calculating their own tax liability. While they report the gross income received, they can deduct ordinary and necessary business expenses to determine their net profit. This net profit, not the gross revenue, is the amount subject to income and self-employment taxes.

Investment and Property Income

Interest earned from bank accounts, certificates of deposit (CDs), or corporate bonds is considered taxable in the year it is credited to the account, regardless of whether the funds are withdrawn. This type of income is reported to the taxpayer and the IRS on Form 1099-INT, Interest Income.

Dividends paid out by corporations to their shareholders are also subject to tax. These payments, which represent a distribution of the company’s profits, are reported on Form 1099-DIV. Most dividends from U.S. companies are considered “qualified dividends,” which are taxed at lower long-term capital gains rates, provided the investor has held the stock for a specified period. Dividends that do not meet these criteria are “ordinary dividends” and are taxed at the individual’s regular income tax rate.

Profits from the sale of property or investments, known as capital gains, are taxable. A capital gain occurs when a capital asset, such as stocks or real estate, is sold for more than its original purchase price, or “cost basis.” If an asset is held for one year or less, the profit is a short-term capital gain, which is taxed at the individual’s ordinary income tax rate. If the asset is held for more than one year, the profit is a long-term capital gain, which is subject to more favorable tax rates.

Income received from renting out property is also taxable. This includes the gross amount of rent payments collected from tenants. Landlords report this rental income on Schedule E and can deduct related expenses to arrive at the net taxable rental income. These expenses include:

• Mortgage interest
• Property taxes
• Insurance
• Maintenance costs

Retirement Distributions and Government Payments

Distributions from most retirement accounts are taxable. When an individual withdraws funds from a traditional Individual Retirement Arrangement (IRA) or a 401(k) plan, the money is treated as ordinary income for that year. This is because contributions to these accounts are often made on a pre-tax basis, meaning taxes have been deferred.

The taxability of Social Security benefits depends on a taxpayer’s total income. The IRS uses a calculation called “provisional income,” which includes adjusted gross income, non-taxable interest, and half of the Social Security benefits received for the year. If this provisional income exceeds certain thresholds, a portion of the benefits becomes taxable. Up to 85% of Social Security benefits can be subject to income tax for higher-income individuals.

Unemployment compensation is considered taxable income by the IRS. Any benefits received from a state unemployment insurance program are subject to federal income tax. At the end of the year, recipients of unemployment benefits will receive Form 1099-G, Certain Government Payments, which shows the total amount of compensation they received.

Miscellaneous and Other Taxable Items

Prizes and awards, such as winnings from a lottery, a game show, or a raffle, are considered taxable income. The fair market value of non-cash prizes, like a car or a vacation, must also be included in the winner’s income. The payer may issue a Form W-2G, Certain Gambling Winnings, if the winnings exceed certain thresholds.

Gambling winnings are fully taxable and must be reported on a tax return. This includes money won from casinos, horse racing, and lotteries. A taxpayer can, however, deduct gambling losses, but only up to the amount of their winnings. These losses must be itemized on Schedule A and cannot be used to reduce other types of income.

When a debt is canceled or forgiven, the canceled amount is often considered taxable income. If a lender forgives a portion of a loan, the borrower has an economic gain that the IRS views as income. The lender will send the borrower a Form 1099-C, Cancellation of Debt, showing the amount of debt forgiven. There are some exceptions to this rule, such as for debts discharged in bankruptcy.

Bartering, which is the exchange of goods or services without money, results in taxable income for both parties. The fair market value of the goods or services received must be reported as income. For example, if a painter offers to paint a dentist’s office in exchange for dental work, both the painter and the dentist have received taxable income equal to the value of the services they received.

Money received for serving on a jury is considered taxable income and must be reported. This compensation is reported on the “other income” line of Form 1040.