Common Inclusions

• Salaries and Wages: Wages and salaries paid, even if no W-2 is issued, are taxable in the year received. The law is clear. An individual is taxed on practically everything earned in the course of employment. This includes tips, severance pay, bonuses, commissions, sick pay, awards, jury fees, vacation and dismissal pay. Payment made to the parents for the wages of their child is taxable to the child.
  
• Unemployment Benefits: All unemployment benefits received from state or Federal agencies are taxable. Those received from a union are generally taxable to the extent they exceed dues paid in. Supplemental unemployment benefits paid from the employer are included as salary and wage payments.
  
• Strike Pay: Amounts received from unions during strike or lockout situations are typically taxed as wages. This is especially true when benefits are paid as a condition to participating in strike related activities.
  
• Dividends: Corporate dividends paid out of earnings and profits are subject to regular income tax. In certain situations, these payments may receive special capital gain treatment. Dividends received via partnerships, S Corporations, and estates and trusts flow through to the individual tax return and retain their same character for Form 1040. That is, they are taxed as dividends.
  
• Interest: Generally all interest received - except that from tax exempt investments - is taxable. Included are earnings from deposits in credit unions, savings and loan associations, mutual dividends and others which might be called dividends by the institution but are in fact interest income.
  
• Property Sales: Recognized gains on property sales are taxable as ordinary income and/or capital gains income depending on the nature and holding period of the property. Gain is computed by comparing the selling price and adjusted basis (usually cost) of the property.

• Distributions From Retirement Plans: Unless the lump sum distribution is rolled over to a qualified plan within the required time frame, it is typically taxable under a set of complex rules. Early distributions - those before age 59 ½ unless due to separation - are subject to regular income tax and likely a ten- percent penalty tax.
  
• Social Security: Up to 85% of social security benefits received may be taxable depending on a taxpayer's other provisional income. Complex worksheets are provided in the instructions, which are used to determine the taxability of any benefits received.
  
• S Corporation and Partnership Income: A prorata share of the taxpayer's ownership interest in the income of an electing S Corporation or partnership is include in the individual income tax return. For the most part, the income is taxable whether or not any distributions have been received from the entity.
  
• Commercial Annuities: The tax treatment of amounts received under an annuity is dependent on the starting date of the payments and the taxpayer's age. In addition, the taxable amount of the annuity can be computed only after figuring the individual's investment in the contract. Absent any investment, the entire annuity receipts are included as taxable income.
  
• IRA Distributions: Unless rolled over within sixty days, any distribution from or conversion of a regular IRA account generates taxable income.
  
• Rental and Royalty Income: Except for certain income excluded under the vacation home rules, all income received from rents and royalties is included in taxable income. Advance rentals/security deposits are included in the year actually received. Specific rental expenses (including depreciation) are allowed against the rental income in determining the amounts subject to tax. A final hurdle involves the passive loss rules.
  
• Business Income: Gross business income determined via the cash or accrual method of accounting is included in income. The constructive receipt rule is applicable here. Of course, ordinary, necessary and reasonable deductions are allowed in arriving at net business income.
  
• Lawsuit Payments: Proceeds from lawsuit settlements are taxable to the extent of punitive damages and other damages for mental and emotional anguish.
  
• Alimony: Amounts received as a result of a divorce and meeting the definition of alimony are taxable income as such.

Typical Exclusions

• Military Pay: Money received from the Armed Forces for combat pay and benefits are generally not taxable.
  
• Veterans' Disability Benefits: Disability benefits received under the V.A. are not included in income.
  
• Child Support: Child support payments in the case of divorced or separated parents is not included in income.
  
• Personal Injury: Damages received in a lawsuit or from an insurance company as a result of personal injury (which is not due to negligence on behalf of the taxpayer) are excluded from income.
  
• Employee Fringe Benefits: Most employee fringe benefit payments are not taxable. These include educational benefits, professional dues and publications, transportation reimbursement, parking allowance, medical insurance premiums, basic group term life insurance, and worker's compensation benefits. Other tax exempt payments are no additional cost benefits, meals and lodging furnished for and on the premises of the employer, working condition fringes, and moving expense reimbursements.
  
• Gifts and Inheritances: Amounts received as gifts - or inherited money or property - are not subject to income tax to the beneficiary.
  
• IRA and Other Retirement Distributions: To the extent these are rolled over properly on a timely basis, they may not be taxable.
  
• Life Insurance: Any life insurance paid as a result of the death of the insured escapes taxation.
  
• State and Local Tax Refunds: For taxpayers using the standard deduction, a subsequent refund of overpaid state or local income taxes is not included in income.
  
• Distributions from Partnerships and S Corporations: Typically, the money received from partnerships or S Corporations, which does not represent guaranteed payments or salary, is not taxed. As noted above, the taxable portion is the share of entity net income.
  
• Scholarships: Scholarships that are used for tuition, books, fees and supplies are not taxable income.

In conclusion, the above outline of items included in and kept out of taxable income is not intended to be all-inclusive. Instead it just highlights some of the more common items received by a typical taxpayer. Remember however, all income is subject to taxation - no matter in what form it is received - unless Congress says otherwise.