What Is Taxable Income? What Income Is Not Taxable?
There are many kinds of taxable income, as well as many types of non-taxable income. Your gross income generally includes income from all sources, in whatever form it takes. Below are examples of taxable and non-taxable income to consider when determining whether a tax return must be filed.
Do I need to file a tax return?
Examples of Taxable Income
Tips and Gratuities
All tips that you receive on the job (for restaurant work, babysitting, delivery or valet services, etc.), whether the majority of your income is derived from tips or wages, is considered income and is subject to federal income tax. Non-cash tips in the form of gifts, tickets to sporting events, or other items of value are generally subject to federal income tax.
You must report cash, check, or credit card tips to your employer so they can withhold Social Security, Medicare, retirement tax, or any other applicable taxes from your total tips.
Am I Required to Report Tips?
If you receive $20 or more in tip income in a single calendar month, you must report that income to your employer and they must withhold Social Security and Medicare taxes. If you do not make more than $20 in tips in a single month, you do not have to report the income to your employer but you must report the income on your federal tax return.
Learn more in Publication 531- Reporting Tip Income
If you receive alimony from your spouse or former spouse, you must report the alimony as income in the year that you receive it. Note that child support is not alimony.
Deducting Alimony Payments
Alimony payments that you make during the tax year are only tax deductible if they are made under an official divorce decree and all of its qualifications are met. Payments that are not made under an official decree or agreement (e.g. a verbal consensus between two parents) are not tax deductible.
Learn more in Publication 504 -Divorced or Separated Individuals
Money and prizes won by gambling are considered income and subject to federal income tax. You have to report all of your gambling winnings on your tax return. You must include all cash winnings and the fair market value of non-cash winnings as taxable income.
You may deduct your gambling losses if you itemize your deductions. However, deductible gambling losses may not be greater than the gambling income reported on your return. In order to take deductions for your losses, the IRS requires you to obtain a statement from the institution with whom the losses were incurred.
Learn more about taxes on gambling income
Deducting Moving Expenses
Moving Expenses can be tax deductible if you move for business and meet certain criteria. If you personally finance your moving expenses, the moving arrangement must meet two requirements to qualify as tax deductible: (1) Your new place of business must be at least 50 miles from your old home and (2) you must work 39 weeks out of the first 12 months right after you move to your new location.
Employer-Reimbursed Moving Expenses
If your employer pays for you to relocate, and the moving expenses would have been deductible if you had paid them yourself, you do not have to include the paid moving expenses as taxable income. If your employer pays your moving expenses, but you do not meet the criteria for tax deduction, i.e. your new place of employment is not at least 50 miles from your old home then you must include the employer financed move as gross income.
For example, if Joe gets a new job that is 35 miles away and his employer moves him 5 miles away from his new job, Joe must include the moving expenses paid by his employer as taxable income. If Joe’s new job is 1000 miles away and his new employer moves him 980 miles closer to his new job, the moving expenses paid by his company do not have to be included in Joe’s gross taxable income.
Learn more in Publication 521 -Moving Expenses
Canceled or Forgiven Debt
As a general rule, debt that is canceled or forgiven by an official lender is considered taxable income. For example, if you settle a credit card debt for less than the full balance, you will owe income tax on the amount that was forgiven. There are some circumstances in which the canceled debt may be excluded from your taxable income.
Certain student loans containing a provision that part or all of the debt incurred to attend a qualified college or university will be canceled if you work for a certain period of time in a certain profession.
If the taxpayer received a Form 1099-C, Cancellation of Debt, in relation to their main home, it may be nontaxable.
Learn more in Publication 4681 -Canceled Debts, Foreclosures, Repossessions, and Abandonments
Unemployment benefits must generally be included on your federal and state income tax returns as taxable income. Unemployment income includes any money and the value of any other assistance received under the unemployment laws of the United States or of a particular state. This also includes disability benefits. You should receive a Form 1099 that shows the total amount you were paid.
Learn more about unemployment income and taxes
Social Security Benefits
If Social Security is your only form of income, then it is almost never taxable. If you had income from other sources in addition to your Social Security benefits, it is possible that a portion of your benefits may be taxable. In general, your Social Security income will only be taxed if your combined income from all sources is more than a base amount determined by your filing status.
Find out if your Social Security income is taxable.
Retirement Plan Income
Retirement plan distributions are generally taxable, unless the distribution is from a Roth IRA or a Designated Roth Account, in which case it is nontaxable. Read about the different types of retirement plans and their tax benefits.
Learn whether required minimum distributions from retirement plans are taxable.
Early, non-required, withdrawals of retirement plan funds are taxable as income and may be subject to a penalty of 10% additional tax. Find out about the penalties for early withdrawal from a retirement plan.
Pension and Annuity Income
Pensions and annuities are either fully taxable or partially taxable depending on your contributions. Your pension or annuity is fully taxable if all of the contributions were made by your employer prior to including it in your taxable wages or salary. Returns on payments made with after tax dollars are partially taxable. In that case you will not be charged tax on the cost of the plan or investment but only on the non-taxed interest accrued in the pension or annuity.
Learn more about pension and annuity income.
When you exchange goods or services for other goods or services, you are required to include the value of those goods or services as taxable income. The value of bartered goods and services is determined by the fair market value of an exchange between unrelated parties. You cannot deduct any expenses that may be incurred while fulfilling a bartering agreement.
Other Examples of Taxable Income
Other kinds of generally taxable income:
- Back pay
- Barter income
- Business income
- Capital gains
- Cashed out vacation or sick time
- Clergy pay
- Compensation for personal services
- Director’s fees
- Disability benefits (employer-funded)
- Employee awards
- Employee bonuses
- Estate and trust income
- Exchanges of policyholder interest for stock
- Farm income
- Gains from sale of property or securities
- Hobby income
- IRA distributions
- Jury duty fees
- Lump sum distributions
- Military pay (not exempt from taxation)
- Military pension
- Non-employee compensation
- Notary fees
- Partnership, Estate and S-Corporation income
- (Schedule K-1s, Taxpayer’s share)
- Punitive damage
- Railroad retirement—Tier I (portion may be taxable)
- Railroad retirement—Tier II
- Refund of state taxes (if itemized in year paid and taxes were reduced because of deduction)
- Rental income
- Self-employment income
- Severance pay
- Supplemental unemployment benefits
Note: This list is thorough but not comprehensive; there are other kinds of taxable income out there.
Examples of Nontaxable Income - Income that Can't Be Taxed
Scholarships and Grants
Funds from scholarship and fellowship grants are generally not taxable as long as you're a candidate for a degree at a qualified educational institution AND the amounts you receive are used for tuition, fees, or other qualified educational expenses.
Any funds spent on non-required expenses, such as housing costs, are usually considered taxable income.
Learn more about tax breaks for students.
Insurance proceeds that are generally nontaxable include:
Life insurance proceeds that were paid to you because of the insured person's death are not taxable unless the policy was turned over to you for a price.This is true even if the proceeds were paid under an accident or health insurance policy, or under an endowment contract. However, note that interest income from life insurance proceeds may be taxable.
If you receive child support, that income is not taxable. If you pay child support, that payment is not tax deductible.
Any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA) are generally non-taxable. These benefits include, but are not limited to:
- Education, training, and subsistence allowances
- Disability compensation and pension payments for disabilities paid either to veterans or their families
- Grants for homes designed for wheelchair living
- Grants for motor vehicles for veterans who lost their sight or the use of their limbs
- Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death
- Interest on insurance dividends left on deposit with the VA
- Benefits under a dependent-care assistance program
- The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001
- Payments made under the compensated work therapy program
- Any bonus payment by a state or political subdivision because of service in a combat zone
Sickness and Injury Payments
Health Plan Payouts
In general, you must report income in any amount you receive for sickness or personal injury through a health or accident plan that is paid for by your employer. If you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you.
Any amount paid to reimburse you for medical expenses you incurred after the plan was established is generally non-taxable income.If you pay the entire cost of a health or accident plan,don't include any amounts you receive from the plan for sickness or personal injury as income. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement.
In most cases, if you are covered by a health or accident insurance plan through a cafeteria plan, and the amount of the insurance premiums was not included in your income, you're not considered to have paid the premiums and you must include any benefits you receive in your income. However, if the amount of the premiums was included in your income, you are considered to have paid the premiums and any benefits you receive are non-taxable.
Payments you receive as workers' compensation for an occupational sickness or injury are fully tax-exempt if they are paid under a workers' compensation act or statute. The exemption also applies to payments made to your survivors. However, the exemption doesn't apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.
If part of your workers' compensation reduces your Social Security or equivalent railroad retirement benefits received, that part is considered Social Security (or equivalent railroad retirement) benefits and may be taxable.
Gifts, Bequests, and Inheritances
In general, property you receive as a gift, bequest, or inheritance is not included in your gross income. However, if property you received in this manner later produces income (such as interest, dividends, or rents), that income is taxable. If property is given to a trust and income from it is paid, credited, or distributed to you, that income is taxable.
An inheritance is not reported on your income tax return, but a distribution from an inherited pension or annuity is, and is subject to the same tax as the original owner would have had to pay.
Meals and Lodging
You don't include the value of meals and lodging provided to you and your family by your employer if the following conditions are met:
- The meals are furnished on the business premises of your employer and furnished for the convenience of your employer.
- The lodging is furnished on the business premises of your employer, furnished for the convenience of your employer, and a condition of your employment.
In addition, the amount that qualifies as a de minimis fringe benefit is nontaxable.
Other Examples of Non-Taxable Income
- Aid to Families with Dependent Children (AFDC)
- Damages for physical injury (other than punitive)
- Death payments
- Dividends on life insurance
- Federal Employees’ Compensation Act payments
- Federal income tax refunds
- Interest on tax-free securities
- Interest on EE/I bonds redeemed for qualified higher education expenses
- Payments to the beneficiary of a deceased employee
- Relocation payments or payments in lieu of worker’s compensation
- Rental allowance of clergyman
- Social security benefits (if it is your only form of income)
- Supplemental Security Income (SSI)
- Temporary Assistance for Needy Families (TANF)
- Welfare payments (including TANF) and food stamps
Note: This list is general; there are many other kinds of non-taxable income.
For a full list of income that the IRS cannot touch, visit tax free Income.
Learn more in Publication 525 -Taxable and Nontaxable Income
Federal income tax exemptions reduce your taxable income. Each tax exemption is worth $3,900 for Tax Year 2013.
Learn more about income tax exemptions
If you do not itemize deductions, you may subtract the standard deduction from your taxable income when you prepare your tax return.
Learn more about the standard deduction
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