Income must be claimed on every American taxpayer's income tax return each year. Sources of income are numerous, and can be overwhelming to the average taxpayer. Form 1040 of the individual income tax return lists types of income that must be included on the return, line by line. Many types of income must also be included on various other forms and then transferred to the 1040.
Earned income is the most common form of income, and is reported on line 7 of Form 1040. According to the Internal Revenue Service, earned income includes all taxable income and wages received from working, either from someone who pays you or from a business you own. Included in this category are wages, salaries, tips, dependent care benefits, union strike benefits and long-term disability benefits. Taxpayers with wages and salaries should receive a W-2 from their employers each January that details their income for the tax year. All income information on the W-2 should be reported somewhere on the tax return, regardless of whether or not the income is taxable.
Unearned income is more broad in nature. According to the IRS, it includes income other than that received as wages, salary, or profit from self-employment. Dividend and interest income fall into this category. Retirement income, including pensions and annuities, is also included, and may or may not be taxable. Capital gains, alimony, unemployment income, prizes and awards are also types of unearned income. Most of the income in this category is reported to the taxpayer on various 1099 forms.
Variable income includes rents, royalties and business income, including partnership and S corporation income. According to IRS Publication 525, these types of income are reported differently than earned and unearned income. The income ends up on the 1040, but must first be reported on various other schedules. Rental income can be reported on line 21 of Form 1040 only for non-business income, but must be listed on Schedule C for business income. Royalties are reported on part 1 of Schedule E. Partnership income is first reported on Form 1065 and an S corporation on Form 1120.
Schedule C, Profit or Loss from Business, is the form used for self-employment income. Sales, commissions, and revenue from services rendered are all included on this schedule. Expenses for the business are also included on Schedule C to arrive at a net profit or loss for the business. The net amount must be included on line 12 of Form 1040.
Income earned by dependents of the taxpayer may or may not have to be included on a parental tax return. According to IRS Publication 929, "for federal income tax purposes, the income a child receives for his or her personal services (labor) is the child's, even if, under state law, the parent is entitled to and receives that income." The parent may elect, however, to include the child's unearned income on their tax return as long as certain criteria are met. Doing so will avoid having to file a separate return for the child.
Types of income excluded from tax are child support, economic recovery payments, vouchers under the "cash for clunkers" program, Pay-for-Performance Success Payments, life insurance proceeds, gifts and bequests. Restrictions apply to some of these income sources. Consult a tax professional or purchase tax software to avoid common mistakes, and to ensure that all necessary income is included on the tax return.
Lara Lawrence has been writing professionally since 2008, with articles appearing in “The Pioneer East." Lawrence is a professional pianist and has been teaching piano for more than 20 years. She is a member of the National Federation of Music Clubs and holds a Bachelor of Science in business administration from Central Michigan University.