Tuesday, December 28, 2010

Third Commandment: All thy income is taxable ... unless tax law explicitly states it can be excluded.

Commandment #3: Thou shalt report all thy income on thy 1040 unless there is an explicit provision in tax law allowing thee to exclude it from thy tax base.

The general rule: all income is subject to income tax unless there is a provision in tax law explicitly excluding it from taxation.

Do not leave income off a taxpayer's return unless you can find an explicit provision allowing you to do so. Even there--be careful!

For example, even though gifts are excludable from taxable income, not everything called a "gift" is actually a "gift" for tax purposes. If your taxpayer's grandma gave him a gift, it's different from his employer giving him a gift. If in doubt, check with your professor!

And remember, "income" does not have to be in cash to be "income." That year's supply of dog food you won on a game show is income! So is that "designer purse" you won at a charity raffle. Or the Xbox you won in the Microsoft College Puzzle Challenge. So is the bike your employer gave you if you worked at Ikea. (See here for more on that.) Even a scholarship that provided free room or board is income. (See here for more on that.)

For more information on common types of taxable and non-taxable income, see here.

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