What Is Considered Taxable Income?

Financial Horizons: Insights for Building Wealth and Securing Your Legacy

By Dr. Jose G. Cardenas, Chief Tax Strategist at The C & R Group, LLC

Here’s the truth a lot of people miss:

The IRS doesn’t just tax your “paycheck.” It taxes a lot of the money flowing into your life—from your job, your side hustle, your investments, and more.

If you don’t clearly understand what counts as taxable income, you’re flying blind. That’s how people end up with surprise tax bills, underreported income, or missed opportunities for smarter planning.

In this article, we’ll break down—clearly and simply—what the IRS generally considers taxable income, what usually isn’t taxable, and how this affects your long-term wealth strategy.

Taxable Income in Plain English

At the most basic level:

Taxable income is the portion of your total income that’s subject to federal (and often state) income tax after allowed adjustments, deductions, and exemptions are applied.

Think of it like this:

1. You start with all the income you earned or received.
2. You subtract certain allowed adjustments (like some retirement contributions or HSA contributions).
3. You subtract the standard deduction or your itemized deductions.
4. What’s left is taxable income—the number your tax rates are applied to.

So the game isn’t just “earn money.” It’s what kind of money, how much, and what the rules are around it.

Common Types of Taxable Income

Let’s walk through the major categories most people deal with.

1. Wages, Salaries, and Tips (Earned Income)

This is the most obvious one.

If you’re an employee and receive a:

• W-2 at the end of the year
• Regular paycheck with federal and state taxes withheld

…that income is almost always taxable.

This includes:

• Hourly or salary wages
• Overtime
• Bonuses and performance incentives
• Commission-based income
• Reported tips (and yes, technically all tips are taxable, even cash)

If it shows up in the “wages, salaries, tips” box on your W-2, it’s taxable income.

2. Self-Employment and Side Hustle Income

If you:

• Drive for rideshare or delivery apps
• Freelance as a designer, consultant, coach, or tutor
• Sell products online
• Run a small business, even from home

…that income is usually considered self-employment income.

Key points:

• You generally report gross income minus allowable business expenses.
• The net profit is subject to income tax and self-employment tax (Social Security + Medicare).
• Even if you don’t receive a 1099 (NEC or K), your earnings are still taxable.

This is one area where people get into trouble because they mistake “side cash” for “free money.” The IRS does not see it that way.

3. Interest and Dividends

Money that your money earns is often taxable, too.

Interest income may come from:

• Savings accounts
• CDs
• Money market accounts
• Certain bonds

Dividend income may come from:

• Stocks
• Mutual funds
• Some ETFs

Depending on the type of dividend, it may be treated as ordinary income or qualified dividends (which can be taxed at more favorable long-term capital gains rates), but either way—it’s generally taxable.

4. Capital Gains (Profits on Investments and Property)

When you sell an asset for more than you paid (or more than its adjusted basis), the profit is usually a capital gain, and that’s typically taxable.

This can include:

• Stocks, bonds, mutual funds, and ETFs
• Real estate (other than some exclusions for the sale of a primary residence)
• Cryptoassets
• Certain collectibles

Capital gains come in two flavors:

• Short-term capital gains
  Assets held one year or less
  Usually taxed at ordinary income rates
• Long-term capital gains
  Assets held more than one year
  Often taxed at preferential capital gains rates

Understanding this timing alone can be a powerful tax strategy lever.

5. Rental and Royalty Income

If you:

• Rent out a home, apartment, room, or vacation property
• Collect royalties on creative work, patents, or mineral rights

…that income is typically taxable.

The good news?

You may also be able to deduct related expenses, such as:

• Mortgage interest and property taxes (for rentals)
• Repairs and maintenance
• Depreciation
• Certain travel and management costs

Handled well, rental income can become a powerful wealth-building engine with strategic tax treatment.

6. Retirement Distributions (From Pre-Tax Accounts)

Money you receive from certain retirement accounts is often taxable when it comes out, especially if you got a tax break when it went in.

Examples:

• Traditional IRAs
• 401(k)s, 403(b)s, and similar employer plans
• SEP and SIMPLE IRAs
• Some pension and annuity payments

In many cases, distributions from these accounts are treated as ordinary income unless there’s a specific after-tax component.

On the other hand, Roth IRAs and Roth 401(k)s can provide tax-free qualified withdrawals when rules are met—one of the reasons they’re so attractive for long-term planning.

7. Unemployment Compensation

Many people are surprised by this one:

Unemployment benefits are usually taxable at the federal level (and in some states at the state level).

If you received unemployment during the year, expect a form (often 1099-G) and understand it generally counts as taxable income—unless specific relief provisions apply for a particular year.

8. Certain Social Security Benefits

Social Security gets its own set of rules.

Depending on your overall income, up to 85% of your Social Security benefits may be taxable.

The actual amount depends on your:

• Filing status
• “Provisional income” calculation (which includes other income plus half of your Social Security benefits)

This is a big deal for retirees. Coordinating Social Security, pensions, retirement account withdrawals, and other income is key to keeping your tax bill under control.

What’s Not Taxable? (Quick Contrast)

We just covered a lot of what is taxable. For contrast, some items are often nontaxable, such as:

• True gifts you receive
• Many life insurance death benefits
• Certain workers’ compensation benefits
• Some disability income, depending on who paid the premium
• Many inheritances (though inherited retirement accounts have their own rules)

I covered these in more detail in the recent Financial Horizons article on Top Sources of Nontaxable Income—but the big idea is this:

Don’t assume everything is taxable—and don’t assume everything is tax-free.
Know the rules for your situation.

Why Understanding Taxable Income Actually Matters

This isn’t just about avoiding trouble. It’s about being strategic.

1. No More “Surprise” Tax Bills

When you understand what’s taxable:

• You’re less likely to under-withhold or underpay
• You can plan for side hustle and investment income instead of being blindsided

Knowledge replaces anxiety with control.

2. Better Decision-Making

Once you know how different types of income are taxed, you can:

• Decide whether to take on extra W-2 hours or build a structured side business
• Choose between pre-tax vs. Roth retirement contributions
• Plan when to sell investments or real estate

Tax isn’t the only factor—but it’s a major one.

3. Smarter Wealth & Legacy Planning

High-income earners and growing business owners must understand taxable vs. nontaxable income to:

• Reduce lifetime taxes legally
• Coordinate retirement, Social Security, and investment withdrawals
• Use tools like life insurance, trusts, and gifting more effectively

The more zeros on your balance sheet, the more this matters.

Common Mistakes People Make With Taxable Income

A few dangerous misconceptions I see over and over:

“I Didn’t Get a Form, So It’s Not Taxable.”

Wrong.

• No 1099? Income can still be taxable.
• Cash or app payments? Still taxable.

Forms help the IRS track income—but they’re not what make it taxable.

“It’s Just a Side Hustle, It Doesn’t Count.”

If you’re providing services or selling products and getting paid, it counts.

The IRS doesn’t care whether you call it a “business,” “side gig,” or “extra money.” If it walks like income and quacks like income…

“If I Don’t Report It, I’ll Just Keep More.”

Short-term thinking.

If you’re ever questioned, matched against 1099s, or audited, unreported income can lead to:

• Back taxes
• Penalties
• Interest
• A world of stress you do not need

Reporting income correctly isn’t just about compliance—it can also unlock deductions, credits, and better planning.

How We Help Clients Master Their Taxable Income Strategy

At The C & R Group, LLC, we’re not just filling in boxes on a form. We’re helping you:

• Map out all your income sources—earned, passive, and portfolio
• Identify what’s taxable, what’s nontaxable, and where you have planning opportunities
• Design a strategy for side hustles, businesses, and investments that aligns with your long-term goals
• Coordinate income, deductions, credits, and entity structure so you keep more over time

The goal is simple: turn the tax code from something that happens to you into something that works for you.

🔗 Read more at: www.thecrgroupllc.com/blog

📅 Want clarity on what’s really taxable in your situation—and how to legally reduce it?
Book a consultation with Dr. Cardenas

About the Author

Dr. Jose G. Cardenas is a retired U.S. Army Finance Officer and the Chief Tax Strategist at The C & R Group, LLC. With a Doctorate in Business Administration and over 20 years of experience in tax planning and financial strategy, Dr. Cardenas helps individuals, side hustlers, and business owners understand their taxable income, reduce taxes legally, and build long-term wealth and legacy. Learn more at www.thecrgroupllc.com

📌 Disclosure

This article is for educational and informational purposes only and is not intended to serve as personalized legal, tax, or investment advice. Rules regarding taxable and nontaxable income, self-employment, capital gains, and retirement distributions are complex and subject to change. You should consult with a qualified tax professional or review official IRS guidance regarding your specific situation before making decisions. Dr. Jose G. Cardenas, DBA, provides tax advisory services through The C & R Group, LLC. Insurance and investment strategies may be offered through his role as a licensed financial professional affiliated with Experior Financial Group.

#FinancialHorizons #TaxableIncome #TaxPlanning #SideHustleTaxes #InvestmentIncome #WealthBuilding #TheCRGroupLLC #VeteranAdvisor #FML100M