Wages, tips and other compensations are subject to federal income tax. The tax money collected goes to a number of different areas, including national defense, law enforcement and paying down the interest on the national debt. In addition, income is broadly defined to include such areas as goods and services traded.
Nearly 40 percent of all Americans do not pay federal income taxes. This non-payment isn’t due to clever accounting tricks, however. It has to do with those people not earning enough money to qualify for having federal income taxes withheld. This can be due to such factors as unemployment, disabilities and being on some form of welfare assistance. These forms of income are not subject to federal income tax. Income that is derived from child support payments is also exempt from being subjected to federal income tax.
Cashing in a life insurance policy is also subject to being taxable under the law. The taxable portion is found by subtracting the cost of the policy from the amount paid out. However, if someone collects on a life insurance policy because of an insurance payout upon death, that amount is not taxable. The only exception is if the policy was given to a person for a price.
Bartering is the trading of goods and services without having any cash change hands. Under the current tax law, bartering income is taxable. The way that it is calculated is by applying the fair market value for the products or services. If someone barters a free dog grooming worth $45, for example, that bartered value is considered taxable income. Form 1099-B is provided to use for reporting bartered income.
If a person steals property, the value of that property has to be reported as income for that year. The only exception to this is if the stolen property is returned to the rightful owner in the same tax year.
Unemployment income is also income that needs to be reported to the Internal Revenue Service, including state unemployment benefits and any money received under the guidelines found in the Disaster Relief and Emergency Assistance Act.