Taxation: Types of Income

Different sources of income are taxed differently. There are:

1. Assessable Income (Non-taxable Income, Taxable Income) and 2.     Non-Assessable Income.

1. Assessable income:

Assessable Incomes are those incomes, which are included in the determination of total income of a taxpayer.

a. Taxable Income:

Taxable Incomes are those incomes that the tax isto be paid on those incomes.

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable and some expenditures not deductible in computing tax. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships.

b. Non- Taxable Income: Non – taxable income is taken into total income for taxation rate purpose but no tax is to be paid on this part of income.

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

Child support payments;

Gifts, bequests and inheritances;

Welfare benefits;

Damage awards for physical injury or sickness;

Cash rebates from a dealer or manufacturer for an item you buy; and

Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering - the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

  2. Non- assessable Income:

 Non- assessable incomes are those incomes which are not included in the determination of total income of a taxpayer.