A:

Most types of income are taxable by the Internal Revenue Service (IRS). In fact, all income is taxable unless it is specifically mentioned in the Internal Revenue Code as not taxable. Some examples of taxable income include gains from stock accounts, real estate capital gains after a sale, gains from the sale of common stock and bonds, income from employment, certain fringe benefits, interest gained from bank accounts and tips. Some tax credits and refunds are also taxable, as are under-the-table transactions and bartering. Inheritances, child support, welfare, manufacturer rebates and adoption expense reimbursements are generally not taxed. Gains in tax-deferred accounts are protected from taxation under specific conditions, but may be taxed later or if those special conditions are violated with an early withdrawal or illegal usage. Taxpayers often apply asset allocation strategies to reduce their total tax liability, including the use of tax-deferment accounts. These are legal methods, and may be used alongside deductions and credits.

To reduce taxable income and thereby achieve a lower tax liability, begin by applying all allowed deductions to calculate the adjusted gross income (AGI). Gross income includes all earned and unearned income, but AGI should be significantly lower on most personal returns. Choosing to itemize deductions or opt for the standard deduction will impact total liability, so it is worthwhile to compare tax liability under both options before filing. AGI is the income the IRS applies taxes to, so lowering this number with allowed deductions will result in a lower overall tax liability. Tax credits can further reduce your liability or even result in a refund for the taxpayer.

RELATED FAQS
  1. What is the difference between taxable income and gross income?

    Understand the basic differences between the terms gross income and taxable income, and what is included in the total of ... Read Answer >>
  2. What deductions, credits and exemptions depend on gross income calculations?

    Understand what deductions, exemptions and tax credits are dependent on the gross income calculation and how these determine ... Read Answer >>
  3. How can I lower my effective tax rate without lowering my income?

    Discover how to reduce your effective tax rate without losing income by maximizing adjustments and deductions, earning tax-free ... Read Answer >>
Related Articles
  1. Taxes

    What is Adjusted Gross Income?

    Adjusted gross income (AGI) is a term from the Internal Revenue Code. AGI is used to determine a person’s income taxes due.
  2. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  3. Taxes

    Ten Things That You Might Not Know Are Taxable

    When you file your taxes this year make sure that you have claimed all taxable income. Here are ten things that you might not know are taxable
  4. Taxes

    Minimizing the Amount of Income Tax You Owe

    The amount of income you receive and tax deductions and credits you take impact how much you'll owe.
  5. Retirement

    Top Tax Tips for Retirees

    Filing your taxes during retirement can be just as time consuming as when you were employed. We have some tips to help you out.
  6. Retirement

    6 Ways to Reduce Taxes in Retirement

    Use these 6 tips before and after you retire to reduce taxes for yourself and your loved ones.
  7. Taxes

    How To Calculate AGI For Tax Purposes

    The first step in completing your taxes is calculating your adjusted gross income. Here’s how.
  8. Taxes

    10 Sources of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
  9. Taxes

    How To Get The Most Money Back On Your Tax Return

    Many people pay more taxes than they have to simply because they don’t know better. Here are a few suggestions for getting the most out of your tax return.
  10. Taxes

    Top 5 Ways to Reduce Your Taxable Income

    Reducing your taxable income is a great way to save money on the taxes you owe. Here are five ways to do it.
RELATED TERMS
  1. Taxable Income

    Taxable income is described as gross income or adjusted gross ...
  2. Assessable Profit

    Taxable income payable after accounting for allowable deductions. ...
  3. Tax Shelter

    A tax shelter is a vehicle used by taxpayers to minimize or decrease ...
  4. Tax Deduction

    A deduction from gross income that arises due to various types ...
  5. Tax Break

    A tax break is a savings on a taxpayer's liability. A tax break ...
  6. Deductible

    1. The amount you have to pay out-of-pocket for expenses before ...
Hot Definitions
  1. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center