Taxable and Nontaxable Income
As you file tax returns, thoughts naturally turn to what income is taxable and what might be nontaxable.
Looking for a hard and fast rule about what income is taxable and what income is not taxable?
Under the law, the fact is that all income is considered taxable unless the law specifically says it is not.
Taxable income includes, of course, money you receive for things such as salaries, wages, tips, interest and dividends, but it can also include noncash income from property or services. For example, in a barter exchange, both parties to the exchange must include the fair market value of goods or services received as income on their tax return.
However some types of income are not taxable except under certain conditions. This would include:
- Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable, a fact few recognize.
- If you got a state or local income tax refund, the amount may or may not be taxable. This depends on whether you itemized deductions for the year the refund originated, deducted the state or local income tax paid and actually received a federal tax benefit from taking the deduction.
You should receive a Form 1099-G from the agency that makes the payment to you. However, you must report any taxable refund you get even if you do not receive a Form 1099-G. - Social security benefits may not be taxable, but at above certain income levels they may be partially taxable. Up to 85% of social security benefits may be taxable if your income is high enough.
- Some types of income that are usually not taxable include the following:
- Gifts and inheritances (welcome news to recipients who tend to worry about paying tax up receiving this)
- Child support payments
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
- Interest received on state and local bonds, although some such bonds, called private activity bonds, may be subject to the alternative minimum tax even if not subject to regular income tax.
More on this topic can be learned from Publication 525, Taxable and Nontaxable Income available from the IRS online at IRS.gov.
