What is income?

What is income?

No matter what the weather report says, each new year brings a flurry of information returns. These forms report the income you received during the prior year, and the size of the paper blizzard is partly due to the definition of “gross income” in the federal tax code.

That definition encompasses all income earned anywhere in the world, including cash and non-cash receipts from sources such as bartering, discharge of debts, and illegal activities.

In addition, you probably noticed there’s no reference to amount. So, although you might not get an information form for amounts under specified limits — the familiar $600 figure for Form 1099-MISC, for example — that income is reportable on your tax return.

Despite the broad nature of the term, not everything you receive is considered gross income. For instance, rebates, refunds, and purchase price adjustments are specifically excluded. Gifts, inheritances, and proceeds from life insurance policies are other familiar exclusions.

However, in contrast to gross income, exclusions tend to be narrowly defined. An illustration: While proceeds from life insurance policies are generally not taxable to you as a beneficiary, interest earned on the proceeds typically is.

Your state may have different rules on what’s includable and excludable when calculating income.

Give us a call if you have questions about the tax effect of your receipts during 2011. We’ll help you dig out the answers  970-207-9724