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
Generally, an amount included in your income is taxable unless it is specifically exempted by law. 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.
What is the difference between taxable and nontaxable income? ›
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.
How do you understand taxable income? ›
Taxable income is the part of your gross income (the total income you receive) that is subject to federal tax. Taxable income and gross income differ for several reasons. First, not all income is taxable. Additionally, tax deductions and credits can lower the amount of your income that is subject to tax.
Why is it important to know your taxable income versus your gross income? ›
Taxable income starts with gross income, then certain allowable deductions are subtracted to arrive at the amount of income you're actually taxed on. Tax brackets and marginal tax rates are based on taxable income, not gross income.
Why is non-taxable income important? ›
From life insurance payouts and inheritances to disability benefits and financial gifts, nontaxable income sources can provide much-needed relief when it comes to calculating your tax bill.
How to determine non-taxable income? ›
Non-taxable income includes gifts, any child support payments received, worker's compensation, welfare benefits, most inheritances, life insurance benefits received, withdrawals from a Roth IRA, healthcare benefits, disability insurance, garage sale income, qualifying scholarships income, court judgments received for ...
Is it bad to have no taxable income? ›
Any year you have minimal or no income, you may be able to skip filing your tax return and the related paperwork. However, it's perfectly legal to file a tax return showing zero income, and this might be a good idea for a number of reasons.
What best describes taxable income? ›
Taxable income is the portion of your gross income used to calculate how much tax you owe in a given tax year. It can be described broadly as adjusted gross income (AGI) minus allowable itemized or standard deductions.
What are the four steps to calculating your taxable income? ›
Here are the four steps:
- Step 1: Determine your filing status. ...
- Step 2: List all forms of your taxable income. ...
- Step 3: Calculate adjusted gross income (AGI) ...
- Step 4: Subtract deductions from AGI to determine taxable income.
Yes, you'll be taxed eventually when you withdraw money from your 401(k). But by then, you might have a smaller retirement income and be in a lower tax bracket.
Key Takeaways
Taxable income is your AGI minus your standard deduction (or itemized deductions from Schedule A) and your qualified business income deduction from Form 8995 or Form 8995-A. Net income typically means the amount of income left over after you pay your income tax or get a tax refund.
What interest income is not taxable? ›
In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer's qualification for certain other tax breaks. The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
What is the tax-exempt income? ›
Tax-exempt income is income from any source which the Federal, state, or local government does not include when implementing its income tax. Individuals and organizations may have to report this income on a tax return, but the income will not be considered when determining their tax liability.
What is the difference between taxable and nontaxable? ›
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.
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.
Non taxable income is money or property you've received from certain sources which are not subject to federal or state income tax under the Internal Revenue Code or state tax regulations. Non taxable income is generally not required to be reported on your tax return. Examples of types of non taxable income are: Gifts.
What is the difference between tax free and taxable income? ›
In the taxable scenario, taxes are applied annually while in the tax-deferred scenario, the investment is not taxed until the money is withdrawn. In the tax-free scenario, the money is an investment that is not subject to Federal or State tax.
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.
What is an 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.
