Monday, February 11, 2013

Reportable vs Taxable Income

Q.  Honey, I'm not sure what the difference between reportable income and taxable income is. Can you please explain?

A.  This is an excellent question, and the terms come up often.  Most of us are familiar with the standard deduction and personal exemption amounts for our marital status and age group. Basically, income reported in excess of these amounts require us to file an annual income tax return.  If the gross income reported is below the standard deduction and personal exemption, usually no income tax return is required.

Notice I said gross income.  Gross income and reportable income are quite often the same.  Thus, if you sell securities for say $100,000 your gross (and in this case) reportable income would require a filing of a return.

Your taxable income, however, may be zero or zilch, if for example, you paid $110,000 for these securities, you would have a taxable loss.  The reason you need to report the reportable income, however, is the IRS or state taxing agencies, have no idea of your basis, and therefore cannot compute your taxable income, as they have no way of knowing your profit or loss.

Oftentimes on Form 1099-R (used for reporting retirement income) the taxable income is lower than the gross reportable income, as part of the proceeds may be a portion of your contribution or another non-taxable fringe benefit such as reimbursements. I hope this helps you.

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