Which type of income is typically subject to taxation?

Wages earned are typically subject to taxation because they constitute compensation for services rendered by an employee. The Internal Revenue Service (IRS) classifies wages as ordinary income, which is taxable at the applicable income tax rates. When an individual receives wages from their employer, those wages are reported on Form W-2, and the employer is responsible for withholding the appropriate amount of federal income tax, Social Security tax, and Medicare tax, to ensure that the employee’s tax obligations are met throughout the year. This systematic withholding process underscores the recognition of wages as taxable income.

In contrast, gifts received, inheritances, and loans obtained do not generally create a taxable event for the recipient. Gifts are usually exempt from income tax, as the giver may be liable for gift tax, if applicable. Inheritances also evade income tax because they are not considered income for the decedent's beneficiaries. Loans, on the other hand, represent borrowed money that must be paid back, and since they do not constitute income, they are not subject to taxation. Thus, the only option that clearly represents taxable income is wages earned.