A Taxing Subject: Definition Of Income

Legal Eagles

A Taxing Subject

By Brian K. Carvell, Esq. Published March 2008

With every new year there is one impending event that most of us dread: April 15th. That’s right, every April 15 we get to thank Uncle Sam for allowing us to earn money in his country, and what better way to show our appreciation than with cash. So this month, I’ll review everyone’s favorite topic – taxes.

Most importantly, everyone needs to understand the definition of income, so you know what you need to claim. The U.S. Tax Code defines income as “all income from whatever source derived.” The wording here is very important. “All” doesn’t mean income in the form of just cash or check – it means any form of compensation received. If you are paid in something other than cash, then you need to claim the value of what you received as part of your gross income. “Whatever source derived” means that the IRS doesn’t care who paid you or why you were paid – they only care that you were paid. It doesn’t matter if you earned the money from your 9-to-5 job, won it on a game show, or if you won a DRUM! Magazine giveaway. The simple rule to remember is that you have to consider what taxes may be owed if you have “more than before.”

Moving on to a happier subject – deductions. Before I give an overview on what can be deducted, let’s review how a deduction works. A deduction is an offset allowed by the government against your gross income, not the taxes you owe. Briefly, if you earned $100,000 gross income in one year, and you are in a 25-percent tax bracket, then you owe $25,000 in taxes. Now we’ll use the same example, but assume you have $50,000 in deductions – you now have $100,000 of gross income, $50,000 less of deductions, which leaves $50,000 of taxable income, and at a 25-percent tax bracket, you owe $12,500 in taxes.

So what is a deduction? Basically, when you have to spend money to make money, the IRS will give you a credit for the money spent, and only tax you on the profit. To break it down and make it applicable to a drummer, assume you made $15,000 gross income gigging in one year, but in that same year you bought a new drum kit ($2,500), replaced sticks and heads ($500), plus gas and lodging while traveling to gigs ($500). You can deduct these expenses against your gross income ($15,000 minus $2,500 minus $500 minus $500) leaving you with $11,500 gross income (the final amount on which you will pay taxes).

This month’s column is just a brief look into the issue of taxes. DRUM! Magazine published a more comprehensive article on taxes in the March 2006 issue, and I encourage everyone to go through their back issues and read it. Taxes can be complicated, but knowing the basics is your first step to fully understanding them – and getting them right!

This article is not intended as legal advice. If you have specific concerns, please contact an attorney.

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