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Taxable and non-taxable income
- By Lawrence Perry
- Published 06/11/2010
- Accounting
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Taxable and non-taxable income
Taxable income is a part of your income that you should declare to your government for taxation purposes. In general, it could refer to the gross income of a corporate or a single entity, which has already been deducted by the cost of goods sold or expenses that have already been incurred. Because rates may vary, and your liability to the government can either go higher or lower, there are several technicalities that surround the idea of taxable income.
In the United States, taxable income is clearly defined in the Internal Revenue Code 63. A taxpayer can have the liberty on what kind of deduction he/she wants to take for his/her tax. Taxpayers can opt for a standard deduction, wherein they cannot specify the items that can be considered as taxable or not. This can be better expressed in this equation:
Gross Income Standard Deductions Allowed = Taxable Income
Another type of taxation for your income may include the deduction of personal exemptions. These are items that should not form part of the taxable income and should not be deducted by tax. However, they are included in the income statement for reporting purposes:
Adjusted Gross Income plus Itemized Deduction plus Personal Exemption = Taxable Income
Non-taxable Income
This is self-explanatory. Non-taxable income is something that you earn for yourself or your company. However, as mandated by the government, they are exempted from the calculation of your tax. Non-taxable income, however, could be reported for transparency purposes.
There are two common kinds of non-taxable income. The first one is referred to as the partnership income. The partnership return is also not taxable, but you should be able to file an information return using the U.S. Return of Partnership Income or form 1065. This document will reflect the performance of the operation of the partnership in a given tax year.
The other one is called S Corporation income. With this type, income, deductions, losses, and credits are all distributed to the shareholders based on their shares in the corporation. Just like in partnership income, the items must be reported in your tax return, though they cannot be subjected to any deduction.
However, one huge advantage of a home-based business is you can actually lower your tax payments. For once, all payments and expenses that are associated to your home can be deducted from your income, so you can decrease the tax liability. These include the mortgage payments for your home, the depreciation costs, insurance, maintenance, and even utilities. If you have vehicles that you utilize for your business, you can also decrease the income further from their depreciation and gasoline expenses.
In the United States, taxable income is clearly defined in the Internal Revenue Code 63. A taxpayer can have the liberty on what kind of deduction he/she wants to take for his/her tax. Taxpayers can opt for a standard deduction, wherein they cannot specify the items that can be considered as taxable or not. This can be better expressed in this equation:
Gross Income Standard Deductions Allowed = Taxable Income
Another type of taxation for your income may include the deduction of personal exemptions. These are items that should not form part of the taxable income and should not be deducted by tax. However, they are included in the income statement for reporting purposes:
Adjusted Gross Income plus Itemized Deduction plus Personal Exemption = Taxable Income
Non-taxable Income
This is self-explanatory. Non-taxable income is something that you earn for yourself or your company. However, as mandated by the government, they are exempted from the calculation of your tax. Non-taxable income, however, could be reported for transparency purposes.
There are two common kinds of non-taxable income. The first one is referred to as the partnership income. The partnership return is also not taxable, but you should be able to file an information return using the U.S. Return of Partnership Income or form 1065. This document will reflect the performance of the operation of the partnership in a given tax year.
The other one is called S Corporation income. With this type, income, deductions, losses, and credits are all distributed to the shareholders based on their shares in the corporation. Just like in partnership income, the items must be reported in your tax return, though they cannot be subjected to any deduction.
However, one huge advantage of a home-based business is you can actually lower your tax payments. For once, all payments and expenses that are associated to your home can be deducted from your income, so you can decrease the tax liability. These include the mortgage payments for your home, the depreciation costs, insurance, maintenance, and even utilities. If you have vehicles that you utilize for your business, you can also decrease the income further from their depreciation and gasoline expenses.
