What Is Taxable Income? You May Be Surprised by What Qualifies and What Doesnt

The answer to the "What is taxable income?" question is a bit more complicated than it might seem. You may think of your income as just your salary, but many of us receive money throughout the year from a variety of sources beyond a primary employer -- and while much of that income is taxable, some of it isn't.

Let's start answering the question above with some lists of taxable and non-taxable income.

Taxable income sourcesTaxable income includes the following sources:

Salaries, wages, bonuses, and tips
Interest income (from bank accounts, CDs, most bonds, and so on)
Dividend income
Business income
Capital gains
Pensions and annuities
Lump-sum distributions (say, from a retirement account)
Rollovers from retirement plans
Rental income and expenses, including security deposits
Farming and fishing income Photo:Got Credit
Unemployment compensation
Royalties
Gambling income and losses
Proceeds from sales
Scholarships and fellowship grants (these are taxable ifyou're not pursuing a degree at an eligible school)
Social Security benefits
401(k) plan income
Income from stock options
Certain canceled debts, including forgiven portions of credit card debt
Alimony income
Awards and prize money
Income received, but not yet deposited, including checks not yet cashed
Severance pay
Jury duty fees
Payment for services as an executor
Payment for serving on a board of directors
Money you steal and any other illegal income

Just because the categories above are taxable doesn't necessarily mean you'll be taxed on all of them. There are rules and exceptions related to many of the categories. For example:

Capital gains are generally taxable, for example, but if you sell your home and meet certain requirements, $250,000 to $500,000 of your gain will not be taxed.
Social Security benefits are taxableonly if the beneficiary's income is above a certain level -- and even then only up to 50% or 85% of the benefits get taxed, depending on the income level.
Gambling losses can be deducted, but you can't deduct more than you won. So winnings of $1,000 and a loss of 1,500 will only give you a $1,000 deduction. For any categories above that apply to you, learn more about their rules.

Image: StockMonkeys.com

Non-taxable income sourcesNot every kind of income is taxable.Below are some of the main kinds that qualify as non-taxable:

Federal income tax refunds
Child support payments
Foster care payments
Scholarships and fellowships (these are tax-free if you're pursuing a degree at an eligible school)
Life insurance proceeds to a beneficiary
Gifts and inheritances
Some veteran benefits
Some welfare payments
Insurance reimbursements for medical expenses not previously deducted
Compensatory damages for personal physical injury or illness
Workers' compensation benefits
Disability benefits from a policy you paid for (as opposed to a work-provided policy)
Some qualified pension distributions for public safety officers
Money rolled over from one retirement plan to another (if done according to the rules)
Debts wiped out due to bankruptcy that are reported on a Form 1099-C
Municipal bond income from bonds issued in your state

Just as with taxable income, there are rules that apply to many of the categories above, so it's smart to check out what rules apply to whatever income sources you have.With gifts, for example, the gift itself may not be taxable, but any income it produces is taxable. (Think of a bond that generates interest payments.)

Calculating taxable incomeYour taxable incomeis not necessarily your total income, as your total income may well include non-taxable money. Even if your only income is a taxable salary, you won't be taxed on all of it. That's because,to arrive at your taxable income, you have to do a little adding and subtracting, per IRS rules. Here's the process:

Gross income- Adjustments= Adjusted Gross Income (AGI)

Adjusted Gross Income (AGI)- Exemptions- Deductions= Taxable Income

You first determine your gross income by adding up all your income for the year. Then you make adjustments by subtracting non-taxable income and exceptions to taxable income, such as contributions to qualified retirement accounts, alimony payments you made, qualifying moving expenses, qualified student loan interest paid, half of any self-employment taxes you paid, and any medical savings account deductions. That leaves you with your Adjusted Gross Income, or AGI, which is used to determine limitations on a number of tax issues, including exemptions, deductible IRA contributions, and itemized deductions.

You then claim your exemptions and make your deductions -- either taking an itemized deduction or a standard deduction-- whichever is greater. This leaves you with your taxable income. The taxes you ultimately pay each year are based on your taxable income, not your gross income or your AGI.

Knowing what taxable income is can help you come tax time.

The article What Is Taxable Income? You May Be Surprised by What Qualifies and What Doesnt originally appeared on Fool.com.

Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.