Money, property, or services that are received are all considered income. Certain types of income may be taxed. However, some may not be taxed. Some of the most commonly taxed income are:

• wages, salaries, tips, bonuses, vacation pay, severance pay, commissions

• interest and dividends

• certain types of disability payments

• unemployment compensation

• cancellation of debt (unless excludable by law or regulation)

• alimony

• gain from the sale of property, stocks and bonds, stock options, etc.

• pension and annuity distributions (amounts not contributed by taxpayer with after-tax dollars)

• traditional IRA distributions (amounts deducted in prior years)

• rental income, farm income, business income

• trust/estate income, Partnership/S-corporation income

• Social Security benefits (above the base amount)

• prizes, awards, gambling winnings, and illegal income

• certain scholarships, fellowships and grants

Whether you are Single, Married, Married Filing Separate, or Head of Household or widow(er) will determine the tax rate applicable to you.

They are all tax-saving mechanisms, but they are distinctly different. Here are the simplified differences:

Deductions and exemptions both reduce your taxable income, and credits reduce your overall tax bill. With reference to Form 1040, exemptions and deductions all take effect on your taxable income, and credits are applied to the tax you pay on that taxable income. Exemptions and deductions reduce your taxes proportionally to your tax bracket, but credits reduce your taxes dollar-for-dollar regardless of your tax bracket. In other words, if you are in the 24% tax bracket, a $1,000 deduction saves you $240 on your taxes, but a $1,000 tax credit saves you $1,000 on your taxes.

Also, having dependent children may allow you to take some dependent-related credits such as the EIC, CTC/ACTC, AOTC or Dependent Care.

Making sure that you have paid the correct amount of taxes during the year, will greatly determine your outcome. Also, those individuals who are self-employed and those who are part of the growing Gig economy must make sure that they pay estimated taxes on their income. Failure to do so could mean a sizeable tax bill and some penalties during to income tax declaration.