What is Considered Income For Tax Purposes?

Tax season is right around the corner. Employers are preparing and sending out W2 forms to their employees and 1099 forms to their contractors. Individuals are receiving a wide variety of tax-related documents.

A threshold issue for proper individual tax reporting is understanding what is considered taxable income. The answer may be surprisingly broad.

Taxable income is defined by law. While W2’s and 1099’s may be vital evidence as to income, each individual taxpayer is responsible for reporting all taxable income, regardless of whether it is documented by an employer or other entity.

Generally speaking, the IRS and the courts have defined taxable income broadly, using language such as “including but not limited to” in their discussions. Taxable income is described as any “accession to wealth” that a person has “clearly realized.”

Under such broad definitions of taxable income, there are many forms of income that are likely to be considered taxable income by the IRS as well as by state and local taxing authorities.

Compensation for services rendered is taxable income even though it was never reported to the recipient on a Form W2 or Form 1099. The taxpayer is responsible for tracking and reporting all such income and runs risks of consequences for failure to do so.

If an employer makes a loan to an employee, then later forgives the repayment of that loan, the employee has received taxable income as a result.

If an employer gives an employee a special bonus or a “gift” of any kind, it is most likely taxable income.

Some fringe benefits from an employer are taxable.

If an individual wins a contest or a prize, such as from appearing on a television game show, the winnings are taxable income.

If a taxpayer “wins” a lawsuit and is awarded damages, certain types of damages are subject to taxation, while other types are not.

Any bank accounts or investments that earned interest are taxable, so long as the increases are “realized” within the tax year.

If an employer reimburses, or directly pays, for any business expenses, but does not do so through a properly designed accountable reimbursement plan, those amounts are taxable income to the employee.

If an employee leaves an employment position and severance pay is given by the employer, the severance pay is subject to taxation.

For ministers who receive a clergy housing allowance, any funds designated as such an allowance that is not spent on qualified housing expenses should be reported as taxable income.

Some income received from rental properties is considered taxable income.

This article cannot cover all the contours of what is taxable income, or take into account each individual taxpayer’s specific situation. Accordingly, it is vitally important to consult with a tax professional in order to determine exactly what qualifies as income under the most recent tax laws. There are serious consequences for under-reporting that must be avoided. Of course, there are financial detriments for over-reporting as well. Seek guidance.

Contact Clergy Financial Resources to help you with the next steps.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com