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.