Income drives the tax system.

It determines whether or not you have to file a tax return, how much tax you have to pay, and partly whether you are eligible for deductions like Earned Income Tax Credit.

For tax purposes, income is not just what your job pays you or what is reported on a W-2. It can include profits on the sale of a home, early withdrawal of retirement accounts -- also subject to a penalty in addition to being taxed as income -- and even cancelled debts.

IRS Publication 17 defines gross income as "all income you receive in the form of money, goods, property and services that is not exempt from tax." It also includes income from sources outside the United States.

This is a very broad definition, designed to make sure the maximum amount of money is taxable. The definition of income does, however, have its limits.

What is income?

First, to be income, the money, assets or items of value must be received by you and be in your control. For example, if a friend wins $10,000 on a TV show, that money is not income to you because you did not receive the money and do not have control over it. Similarly, your minor child's wages are not taxable as income to you, so you might want to encourage your children to file their own taxes to get withholdings back, even if their earnings do not require them to file.

Additionally, to be considered your income, any appreciation or gain on an item must be realized. For example, if you buy stock for $100 and the value of the stock goes up to $150, that $50 gain is not income until you do something with the stock. If you cash out at $150, then you have $50 of income in the form of capital gains. Any dividend payments you receive for owning a stock, or even interest accrued in your savings account, is income no matter how small the amount.

On your Form 1040 tax return, lines 7 through 21 list out the different kinds of taxable income. These include wages, salaries and tips reported on W-2 forms, taxable interest, ordinary dividends, business income, capital gains, taxable IRA distributions, taxable pensions and annuities, rental real estate, farm income, unemployment compensation, taxable social security benefits and other items.

Line 21 is a catchall and lets you list "other income." This is where money that fits the definition of income but is not listed elsewhere must be reported.

One common form of other income is gambling winnings. Often, a W-2G form is issued for gambling winnings, but by law, all winnings are income and must be reported, whether or not you received a Form W-2G.

Another form of other income is income from illegal activities. Even money received as a bribe or other illegal activity is considered "other income" and must be reported.

A commonly misunderstood form of income is alimony.

The person receiving alimony must report the alimony received as income. To be alimony, it must be an alimony payment as characterized in a divorce decree or separation agreement. Child support payments are not alimony, even if they are ordered as part of a divorce or separation decree.

According to Army Regulation 608-99, payment support to family members is not alimony. For divorce or separation agreements made after 1984 to be considered alimony, the payer and recipient spouse cannot file a joint tax return; payment must be made in cash or a cash equivalent, like a check.

For a separation agreement, the parties cannot be members of the same household, and payments cannot be required after the death of the recipient.

What is not income?

Gifts, VA Disability, Social Security if it is your only source of income life insurance, inheritance -- although this may be subject to state tax if large enough -- and pensions for Kentucky state tax purposes, if they are under $41,100 or you retired before 1998 and your pension is from state or federal service are not considered income.

Your income must be reported correctly on your tax return. If it is not reported correctly, the IRS may recalculate your taxes, which could result in liability for back taxes, interest and penalties. Worse, you may be subject to criminal prosecution for tax evasion, willful failure to supply information, fraud and false statements, or preparing and filing a fraudulent return. It's better to report all income the first time and not get audited.

If you have any questions, call the Fort Knox Tax Center at (502) 624-0044. The center is closed on Wednesdays.