Taxable

Taxable summary:

• Taxable income or assets need to be reported to the government.

• Anything you financially benefit from, including wages, stock options, benefits, and court awards, can all be considered taxable income.

• Forgiven or settled debt may be taxable income under certain circumstances.

Taxable Definition and Meaning

Taxable means a transaction or asset that can be taxed. In other words, you may owe money to the government depending on the amount and nature of the transaction or asset.

Types of Taxable Income

Your taxable income could be made up of money, property, or even services. Here are a few things the IRS considers to be taxable income:

• Wages

• Salaries

• Commissions

• Fees

• Tips

• Stock options

• Employee benefits

• Unemployment benefits

• Social Security benefits

• Rent from personal property

• Business income

• Investment income, including interest and dividends

• Royalties

• Virtual currencies

• Bartering

• Canceled debts

• Court awards and damages

• Gambling winnings

This list isn't exhaustive. If you benefited financially from something, chances are good it counts as taxable income. Ask a tax professional if you're unsure if something of value that you received is considered taxable.

Do You Pay Taxes on Forgiven Debt?

Yes, forgiven or settled debt is often taxable as income. For example, if you had $10,000 in credit card debt that was settled for $3,000, the remaining $7,000 that was forgiven could be taxable income.

If a financial institution forgives $600 or more of your principal, the institution must send you a form 1099-C for that tax year. You use this form to report the forgiven debt as income on your income taxes. Even if you don’t receive a form 1099-C, you are obligated to report all canceled debt to the IRS.  

Because forgiven debt may be taxable as income, it could increase the amount of taxes you owe and even put you into a higher tax bracket. (Keep in mind that tax rates only apply to the portion of your income that's in that bracket.)

When is forgiven debt not taxable?

The primary reason forgiven or settled debt wouldn't be taxable is if you were insolvent before the settlement. 

Insolvent means your debts are worth more than your assets. For example, say your assets are worth $25,000. If you owe debts totaling $30,000, you're insolvent in the amount of $5,000. 

Forgiven debt that's less than or equal to the amount you are insolvent may not be taxable.

Continuing with the same example, if your creditor forgives $3,000 worth of debt, that debt may not be taxable because you’re insolvent by $5,000. 

What if a creditor forgives $7,000? The first $5,000 wouldn’t be taxable, but the other $2,000 would be. 

Check out these resources for tax debt relief if you're struggling with tax debt.