What Are the Main Examples of Income?

Income refers to money or other assets an individual receives. This encompasses compensation for goods, services, or returns generated from investments, before any deductions are applied. Understanding the various forms income can take is fundamental to personal finance. Income serves as the foundation for financial well-being, enabling daily expenses, savings, and future investments.

Income from Employment and Business

Income derived from working is a primary source of financial inflow for many individuals. This category includes compensation received as an employee or earnings generated from operating one’s own business or freelance endeavors. The Internal Revenue Service (IRS) considers everything received for personal services as gross income.

Wages, salaries, and tips represent common forms of employee compensation. Wages are hourly payments, while salaries are fixed annual amounts paid bi-weekly or monthly for services performed. Tips are gratuities received by service staff directly from customers. Employers issue a Form W-2, Wage and Tax Statement, detailing the compensation paid to employees.

Self-employment income, in contrast, is earned by individuals who work for themselves rather than for an employer. This includes earnings from freelance work, profits from a small business, or a consultant’s payments. Self-employed individuals receive payments directly from clients or customers and are responsible for their own tax obligations, including self-employment taxes.

Income from Investments

Income generated from assets or capital holdings also constitutes a significant income stream. This type of income is referred to as unearned income, as it does not require active labor. Unearned income is taxed differently than earned income.

Interest income is money earned from lending funds or holding money in an account, such as a savings account or a certificate of deposit (CD). A bank pays interest on deposits, allowing the account holder to earn a return on their saved money. Interest can also be earned from bonds, which are debt instruments issued by governments or corporations.

Dividend income represents a portion of a company’s profits distributed to its shareholders. If an individual owns shares in a company, they receive regular dividend payments as a reward for their investment. Dividends can be paid in cash or as additional shares of stock.

Capital gains arise from the sale of an asset, such as stocks or real estate, that has increased in value since its acquisition. If shares of a company are sold for more than their original purchase price, the profit realized from that sale is considered a capital gain. The tax treatment of capital gains can vary depending on how long the asset was held.

Rental income is money received for the use of property, such as residential homes, apartments, or commercial buildings. This includes regular rent payments from tenants, advance rent payments, and payments for canceling a lease. Rental income is taxable, but property owners can deduct various expenses related to managing and maintaining the property.

Other Common Taxable Income

Beyond employment, business, and investment sources, various other forms of income are subject to taxation. These diverse income streams are recognized by tax authorities as reportable income.

Unemployment benefits are considered taxable income at the federal level. Individuals receiving these benefits must include the payments when filing their federal income tax return.

Gambling winnings, including those from lotteries, raffles, horse races, and casinos, are fully taxable. This includes cash winnings and the fair market value of non-cash prizes. Winnings exceeding certain thresholds are reported to the IRS on Form W-2G.

Awards and prizes, whether in cash or the fair market value of goods, are also considered taxable income. This applies to prizes won in contests, sweepstakes, or game shows. The recipient is responsible for reporting the value of these awards.

Pensions and annuities provide payments from retirement plans or insurance contracts. The taxability of these payments depends on whether after-tax contributions were made to the plan. If no after-tax contributions were made, the payments are fully taxable, whereas payments from plans with after-tax contributions are partially taxable.

Alimony payments, for divorce or separation agreements executed before 2019, were taxable to the recipient and deductible by the payer. However, for agreements executed in 2019 or later, alimony payments are not taxable to the recipient and not deductible by the payer.

Income Not Typically Taxed

While most forms of income are subject to taxation, certain receipts are not considered taxable income for individuals. Understanding these exceptions helps clarify what does not need to be reported to tax authorities.

Gifts, defined as money or property received without any expectation of repayment or exchange, are not taxable to the recipient. While a gift tax may apply to the giver, the recipient does not pay income tax on the gift.

Inheritances, which are assets received from a deceased person’s estate, are not taxable to the beneficiary at the federal level. Estate taxes may apply to the deceased person’s estate, but the individual inheriting the assets does not pay income tax on them.

Child support payments received by a parent are not considered taxable income. These payments are also not deductible by the payer.

Certain insurance proceeds, such as life insurance payouts received by a beneficiary due to the death of the insured person, are not includable in gross income. Similarly, qualified long-term care insurance payments or certain health insurance reimbursements for medical expenses are not taxable.

Qualified reimbursements for business expenses incurred by an employee are not taxable if properly accounted for under an accountable plan. These reimbursements cover legitimate business costs paid by the employee on behalf of the employer.