In most cases, the income you earn from various types of sources is taxable and must be reported on your federal income tax return. However, there are some situations and instances where your income won’t be taxed.
The Internal Revenue Service (IRS) has outlined several items that do not need to be reported as income.
For example, child support payments and gifts or inheritance money is not subject to income tax.
It’s important that you understand what sources of income (including gifts) are subject to taxes and which aren’t so you’re not underpaying or overpaying within a given tax year and filing an inaccurate return.
Here’s what you need to know:
According to the IRS, the following items do not need to be included as taxable income on your tax return:
- Child support payments
- Adoption expense reimbursements for qualifying expenses
- Gifts and bequests
- Inheritance money
- Workers’ compensation benefits (some exceptions are listed in Publication 525, Taxable and Nontaxable Income)
- Meals and lodging for the convenience of the employer
- Any compensatory damages awarded for physical injury or physical sickness
- Welfare benefits
- Cash rebates from a dealer or a manufacturer
Other Items that May or May Not Be Taxed
There are a few items that can be tricky to determine whether they will or will not be taxed. For example, if you receive a college scholarship, you will be taxed for any scholarship funds that would go towards room and board but you won’t be taxed for funds that will be used towards the actual tuition expenses for your degree.
Examples of items that may or may not be included in your taxable income include:
- Life insurance – If you cash out your life insurance policy, you have to include any proceeds from the sale that are more than the cost of your policy as income. But you don’t have to pay taxes on life insurance proceeds that were paid to you because of the insured person’s death unless the policy was turned over to you for a price.
- Scholarship and fellowship grants – If you are pursuing a degree and win a scholarship, earn a grant, or get a fellowship, some expenses may be excluded from your income and won’t be taxable. Room and board costs typically don’t qualify for the exclusion so you will need to report those funds as income. Scholarships, grants, and fellowships for tuition typically are not taxable.
- Non-cash income – Bartering, or trading for services where there is no actual exchange of cash, is still considered a form of “income” in the eyes of the IRS. Make sure to report the fair market value of these types of transactions, and be prepared to pay taxes on these items as part of your income.
If you’re unsure whether a certain source of income or earnings you receive are taxable or not, take a look at the complete list on IRS Publication 525, Taxable and Nontaxable Income.