What Is Taxable Income? What Income Is Not Taxable?
Do I have to claim my babysitting income on my tax return? What about the money I make from selling things online? These are some of the questions that a lot of folks have. What is considered income and do I have to report it on my tax return? Here are the answers to help you:
Most income you receive is taxable and must be reported on your federal income tax return. This would include the most common income such as wages, salaries, tips, and unemployment compensation. These are fully taxable and must be included in your income unless it is specifically excluded by law. Below are examples of other taxable income to consider when determining whether a tax return must be filed.
Get information about Non-taxable income
Examples of Taxable 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
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.
Debt - 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
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
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.
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.
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.
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
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
In addition, there are many other kinds of taxable income. Your gross income generally includes income from all sources, in whatever form it takes. Below are other kinds of generally taxable income.
Other Examples of 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.
Is There Income That May or May Not Be Taxable?
Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:
- Life insurance: If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
- Scholarship or fellowship grant: If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
- Non-cash income: Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.
Do I Need To File a Tax Return If I Have Low Income?
You might not have to file a tax return. You can figure this out here:
Do I need to file a tax return?
Learn more about taxable and nontaxable income in Publication 525 -Taxable and Nontaxable Income
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