Wages, business income, interest, dividends, capital gains are not the only incomes that are taxed by the IRS. If you thought that these being the major forms of income, only these get taxed, then you are wrong. It is just a fraction of where the IRS can put under their axe.
There are various other types of incomes which the IRS eyes at.
• Rental Income: Any rental income received during a year has to be reported in the earned income schedule. Advance rent also must be included in the year it was received. Deposits taken as security cannot be included as they have to be refunded. If you receive services in lieu of the rent from your tenant then you have to include the market value of rent as your rental income. Some expenses related to rental property are tax deductible. Interest paid on mortgage or the expenditures on maintenance or repairs are tax deductible.
• Schedule K-1 income: Schedule K-1 is received for income for Partnership firms (Form 1065), S-corps (Form 1120S) and Trusts (Form 1041). Partnership and S-corps are not taxable entities. The incomes and deductions are distributed amongst the partners or shareholders according to their holding in the firm. Then these get treated on the individual tax returns of each partner or shareholder. When you are a beneficiary of an estate or a trust you will receive some portion of its income. The trust has to file its return on Form 1041, as Form 1040 for individuals. You will receive your income information on Schedule K-1 (Form 1041). This income needs to be reported on your tax return.
• Royalty: Income received by you for allowing the use of your copyrights or patents of your creative work is termed as Royalty Income. Also income from oil and gas and mineral properties.
• Unemployment benefits: The state as well as the federal government provides a bundle of benefits for the unemployed in the form of allowances or insurance. This income is taxable. One can also choose for withholding while receiving the payments.
• Business Income: An individual carrying out an independent business like freelancing or contracting has to report his income from such sources as business income on his individual tax return. You can take deductions for some of your business expenses like office use of home, depreciation and other “ordinary and necessary” expenses.
• Farm Income: This is a little intricate to report. You need to keep track and records of the incomes and expenses related to your farm like crop or livestock. The IRS expects you to do the averaging of your farm income using Schedule J which can be very arduous for someone who does not understand much about finance.
There are various Schedules used to calculate your incomes:
• Schedule B: It is used to report interest and dividend income if it is more than $1500. If there are multiple sources of income, you have to mention them on Schedule B. Once the total income is calculated the Interest income is reported on line 8a, tax-exempt interest income on line 8b, ordinary dividends on line 9a and qualified dividends on line 9b of Form 1040.
• Schedule C: It is used to net your business income and expenses. Then, the net income is shown on line 12 of Form 1040.
• Schedule D: It is used to calculate the net capital gain or loss. Even previous years carryovers are processed on Schedule D, then the net gain or loss gets reflected on line 13 of Form 1040.
• Schedule E: It is used to decipher the net income or loss from Rents, Royalties and Schedule K-1. The final amount gets reflected on line 17 of Form 1040.
• Schedule F: The calculation of farm income and expenses is complex and has to be done on Schedule F and then it has to reflect on line 18 on Form 1040.
This way the IRS digs deep to the abysmal core of your incomes to grab a bite of it.
