Knowing what to claim as taxable and nontaxable income can reduce your tax liability. Here's what you should know.
Key Takeaways
- Income received as wages, salaries, commissions, rental income, royalty payments, stock options, dividends and interest, and self-employment income are taxable. Unemployment compensation generally is taxable.
- Inheritances, gifts, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, welfare payments, and money that is reimbursed from qualifying adoptions are deemed nontaxable by the IRS.
- Money from a qualified scholarship isn't taxable, but if you use the money for room and board or to pay other personal expenses, that portion is normally taxable.
- Miscellaneous income is taxable. This can include the remaining amount of a debt or loan that is canceled, employer contributions to an unqualified retirement plan, and sickness, injury, and disability retirement payments from an employer-paid plan.
What's not taxable
Nontaxable income won’t be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS:
- Inheritances, gifts and bequests
- Cash rebates on items you purchase from a retailer, manufacturer or dealer
- Alimony payments (for divorce decrees finalized after 2018)
- Child support payments
- Most healthcare benefits
- Money that is reimbursed from qualifying adoptions
- Welfare payments
Under certain circ*mstances, the following items may be nontaxable. TurboTax can help you determine what should be included in your return.
- Money you receive from a life insurance policy when someone dies is not taxable. However, if you cash in a life insurance policy, then a portion, if not all of it, is likely taxable.
- Money from a qualified scholarship is not taxable. However, if you use the money for room and board, or use it to pay other personal expenses, that portion is normally taxable.
Compensation
Generally, income can be received in three ways: money, services and property. But, you can also pay tax on income not yet in your bank account. For example, if you receive a check but don’t cash it by the end of the tax year, it is still considered income for the year you received the check.
The IRS requires that you declare all income on your return. This can include:
- Wages
- Salaries
- Commissions
- Strike pay
- Rental income
- Alimony (for divorce decrees finalized before 2019)
- Royalty payments
- Stock options, dividends and interest
- Self-employment income
Typically, unemployment compensation is also considered taxable income. However, for the 2020 tax year, up to $10,200 of unemployment benefits can be excluded from income. If you are married, each spouse can exclude this amount. Amounts over this remain taxable and if your modified adjusted gross income (AGI) is greater than $150,000 then you can't exclude any unemployment compensation.
TurboTax Tip:
Fringe benefits received for services you render are usually considered taxable income, even if someone else receives them, such as your spouse. Taxable benefits may include a company-paid off-site gym membership, a company vehicle for personal use, and holiday gifts from your employer.
Income from fringe benefits
If you receive fringe benefits for services you render, they are usually considered taxable income, even if someone else receives them, such as your spouse. These taxable benefits and perks may include:
- A company-paid off-site gym membership
- A company vehicle for personal use
- Holiday gifts in the form of cash or gift certificates from your employer
- A certain portion of employer-paid dependent care
- Company-paid tuition fees over a certain amount
- Company-paid financial counseling fees
- Employer-paid group life insurance over a certain amount
Miscellaneous income
Income that may not be readily identified as taxable but generally must be included on your tax return includes:
- Employer contributions to an unqualified retirement plan
- The fair-market value of property received for your services
- Disability retirement payments from an employer-paid plan
- Sickness and injury payments from an employer-paid plan
- Property and services for which you bartered
- Money and income from offshore accounts
- The remaining amount of a debt or loan that is canceled or forgiven
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FAQs
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer.
What is the difference between taxable income and non taxable income? ›
Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable. A list is available in Publication 525, Taxable and Nontaxable Income.
What should I put for non taxable income? ›
- Disability Insurance Payments.
- Employer-Provided Insurance.
- Health Savings Accounts.
- Life Insurance Payouts.
- Earned Income in 8 States.
- Corporate Income in 6 States.
- Sale of a Principal Residence.
- Financial Gifts.
The term taxable income refers to any gross income earned that is used to calculate the amount of tax you owe. Put simply, it is your adjusted gross income less any deductions. This includes any wages, tips, salaries, and bonuses from employers.
Which best explains a difference between income and taxable income? ›
Which explains a difference between income and taxable income? Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses.
What is the difference between taxable and non taxable accounts? ›
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Nontaxable accounts provide tax incentives up front, while taxable accounts allow an individual to save and invest funds above the contribution limits on IRAs and other retirement plans.
How do you determine taxable income? ›
For individual filers, calculating federal taxable income starts by taking all income minus “above the line” deductions and exemptions, like certain retirement plan contributions, higher education expenses, student loan interest, and alimony payments, among others.
What are three taxable income examples? ›
Types of taxable income
- Self-employment or side jobs. Freelance or independent contractor work. Goods or services you sell online. ...
- Investments. Capital gains. Stock options, splits or trades. ...
- Benefits paid to you. Retirement plan distributions, pensions or annuities. ...
- Other types of income. Tax refunds, reimbursem*nts and rebates.
Taxable income refers to the portion of your income that can be taxed by the government. This includes wages, salaries, tips, and any other sources of income you might have, like rental properties, capital gains from stock investments or gambling winnings.
What is your taxable income called? ›
Adjusted gross income (AGI)
Your gross income minus any above-the-line deductions. They do not include itemized deductions or the standard deduction.
Non-taxable income is income that is not subject to tax by the government. Most common tax-free income are gifts and government need-based benefits. You are not required to report non-taxable income on your tax return.
What is the difference between taxable income and income tax? ›
Taxable income is the amount of income that is subject to tax… Usually the total amount of income that you earned during a year by employment, dividends, interest, etc.… Income tax is the amount of money that you actually pay in taxes.
What is equal to taxable income? ›
The term “taxable income" often gets confused with income subject to tax. Income subject to tax refers to individual income items—such as wages—that count as income on your tax return. Add all income subject to tax to determine total income. Taxable income equals total income minus deductions.
What is an example of untaxed income? ›
Untaxed income is income that is excluded from federal income taxation under the IRS code. Examples include Supplemental Security Income, child support, alimony, and federal or public assistance.
What is the difference between taxable and non taxable interest? ›
taxable interest income — interest income that is subject to income tax. All interest income is taxable unless specifically excluded. tax-exempt interest income — interest income that is not subject to income tax.
Who has non taxable income? ›
Disability and worker's compensation payments are generally nontaxable. Supplemental Security Income payments are also tax-exempt. Disability compensation or pension payments from the Department of Veterans Affairs to U.S. military Veterans are tax-free as well.
What is the difference between taxable and nontaxable benefits? ›
Although most fringe benefits are subject to taxation, certain benefits are considered nontaxable. In most instances, nontaxable fringe benefits are not subject to federal income tax withholding, Social Security, Medicare or federal unemployment tax, and they often do not have to be reported on a W-2.
