Lesson 7: What Constitutes Income?

Understanding what constitutes income is foundational to navigating Federal Income Tax Law. The Internal Revenue Service (IRS) broadly defines income as any money or equivalent value received, which typically falls into two main categories: earned income and unearned income. For further insights into the topic, you can explore Lesson 8: Earned vs. Unearned Income.

Types of Income

Income can be derived from various sources, and it is essential to recognize the different types:

  • Wages and Salaries
  • Interest and Dividends
  • Business Income
  • Capital Gains
  • Alimony
  • Rental Income

For a comprehensive guide on Federal Income Tax Law, consider reading Federal Income Tax: Examples & Explanations.

Diagram: Types of Income

graph LR A["Types of Income"] --> B["Earned Income"] A --> C["Unearned Income"] B --> D["Wages and Salaries"] B --> E["Business Income"] C --> F["Interest and Dividends"] C --> G["Capital Gains"] C --> H["Alimony"] C --> I["Rental Income"]

Earned Income

Earned income includes money derived from employment or self-employment. It constitutes:

  • Wages and Salaries
  • Tips
  • Net earnings from self-employment

For more detailed information, you might find Taxation of Individuals and Business Entities a useful resource.

Unearned Income

Unearned income refers to income obtained from sources other than employment such as investments and other sources. It encompasses:

  • Interest
  • Dividends
  • Capital Gains
  • Rental Income
  • Alimony

For further reading, check out Fundamentals of Federal Income Taxation.

Mathematical Representation

The total income can be represented mathematically as:

Total Income = Earned Income + Unearned Income

Examples

Here are a few examples to illustrate the concept:

  • A salary of $50,000 from a job is considered earned income.
  • Dividends from stock investments are considered unearned income.
  • Rental income from a property you own is unearned income.

Conclusion

Correctly identifying what constitutes income is crucial for accurate tax reporting and compliance. For a comparative understanding of taxable versus non-taxable income, refer to Lesson 9: Taxable vs. Non-Taxable Income.

For an in-depth understanding, consider reading Federal Income Taxation: Principles and Policies.

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