Understanding the difference between what income that you have received is taxable and what is nontaxable, can aid you in reducing tax liabilities.
Let’s start with the basics! Income can be received in various forms, such as money, property, or services. Unless it is specifically exempted by law, your income is taxable and must be reported on your tax returns.
So exactly what are the taxable types of income? Well, they can be any of the following popular forms of income as listed on the IRS’s website:
- Salaries, wages, commissions, bonuses, and tips
- Severance pays, unemployment compensation, and back pay awards
- IRA withdrawals
- Interest and dividends
- Rents, royalties, and patents
- Capital gains from the sale of investment property
- Stock options and appreciations
- Canceled Debts
- Bartering (non-cash) income
- Gambling winnings and losses
Even if the funds aren’t in your possession you must still report this as taxable income in the year which it was paid to you. For example, you have a paycheck from October that you have not deposited into your bank account, and it’s now January, the IRS still considers this as income that you received in October of the prior year.
Now for the goodies! What are nontaxable types of income, for which you do not need to pay tax and are not required to report? Here are some examples:
- Gifts and inheritances
- Cash rebates
- Certain types of reimbursements
- Welfare benefits
- Damage awards for physical injury/sickness
- Child support payments
However, there are also some “grey area” income types, as they are nontaxable under specific conditions. Some examples of these types of income are:
- Employee benefits (like sick pay or nonqualified deferred compensation plans)
- Certain scholarships and fellowships
- Worker’s compensation, social security, and fringe benefits
- Non-cash income
- Federal and state tax refunds
When reviewing your income at the end of the year, keep in mind that you may not need to pay tax on all of it, depending if it is taxable or nontaxable income.