What Is an Income Basket?

An income basket is a type of designation or category for each type of income that is generated by an individual or a business. The purpose for segregating different types of income into a series of baskets is twofold. One purpose has to do with determining any gains or losses that may be associated with that income, while the other has to do with determining the tax obligation that is associated with each type of income generated.

One of the benefits of using an income basket approach is that it is possible to assess each income stream in more detail, and determine if a particular stream is positive or negative. This is somewhat more complicated to determine if all sources of income are tracked in a single basket, since gains with some of those income sources could offset losses in others, effectively obscuring the severity of the loss in certain areas. By creating an income basket for different types of income such as wages or salaries, returns from bonds, dividends from stocks, and even interest income from savings accounts and certificates of deposits, it is possible to know exactly what is generating an acceptable level of return and what needs to be replaced or reworked in some manner.

Along with making the process of evaluating income streams more efficient, using an income basket approach is often a good idea for tax purposes. In many nations, different types of income is taxed using different schedules. This means the tax table used to determine taxes owed in wages and salary may be different from the table used to calculate taxes on investments. Using the basket approach is particularly important if the tax laws do not allow a loss with one type of income to be offset with gains with a different type of income, since it is easier for the investor to determine how to go about determining the total taxes owed based on current tax laws.

Both businesses and individuals can use the idea of the income basket when arranging finances. Even if tax laws do allow for combining all sorts of income into a common basket and paying in the net amount after accounting for all gains and losses, creating an income basket for each type of income makes it easier to determine if the investment of time and resources into a particular income stream is really worth the effort. For this reason, making sure to incorporate this strategy into the general accounting process is often a good idea.