While you might use the word “income” to represent all of the money you bring in during a given calendar year, the IRS breaks down your income into different categories. It can be confusing enough to navigate the tax codes without adding in this complication—but luckily, Taxation Solutions, Inc. is here to help. The following are a few terms that can help you better understand how your income is assessed by the IRS:
- Earned income: Money you get for personal services, paid out as a salary, commission, or tip
- Unearned income: Income from capital gains, investments, pensions, and other passive activities
- Taxable income: Earned and unearned income combined, minus applicable deductions, adjustments, and exemptions
Why are these distinctions important? If you calculate your taxes owed using the wrong number, you’ll end up paying too much or too little to the government. While overpaying can be an issue for your cash flow and finances, underpaying can lead to far worse fallout, including getting hit with IRS penalties and fees. When determining your taxable income for 2015, you’ll need to take into account the sums of any salaried or freelance work, as well as income from investments, while then making sure to subtract deductions—which might include business expenses, charitable donations, medical expenses, and other expenses.
Worried about getting it all right? Taxation Solutions, Inc. is just a phone call away. We’re St. Louis’s superior source for tax help, and we’ll take excellent care with your case.