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
Some common forms of nontaxable income include inheritances, cash gifts of $18,000 or less, scholarships that cover school tuition and fees, alimony, child support, and welfare payments. Taxable income can be “earned” on the job, as with wages, salaries, and commissions.
What is the difference between taxable income and non taxable income? ›
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 3 things must you know to determine your taxable income? ›
To calculate your taxable income, first determine your filing status. Next, collect documents for all sources of income. After that, calculate your adjusted gross income (AGI). Finally, subtract your deductions from your AGI to determine your taxable income.
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.
Why is it important to know your taxable income versus your gross income? ›
Gross income includes all income you receive that isn't explicitly exempt from taxation under the Internal Revenue Code (IRC). Taxable income is the portion of your gross income that's actually subject to taxation. Allowable deductions are subtracted from gross income to arrive at your taxable income.
Do I have to report non-taxable income on my tax return? ›
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.
How do I know what is taxable income? ›
Most income is taxable unless it's specifically exempted by law. Income can be money, property, goods or services. Even if you don't receive a form reporting income, you should report it on your tax return. Income is taxable when you receive it, even if you don't cash it or use it right away.
What should be included in taxable income? ›
Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.
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.
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.
Lowering taxable income will often reduce what you owe in taxes. This reduction could result in a refund or simply reduce what you owe.
What is the difference between taxable income and net taxable income? ›
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 type of income is 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.
Why is taxable income higher than 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.
Why is it important to have a basic understanding of income taxes? ›
With that in mind, understanding the tax system and its potential cost can be very important to help individuals and businesses navigate their financial strategies to minimize the overall impact of taxes.
What is taxable and non taxable Social Security income? ›
Your Social Security is not taxable if your total income for the year is less than $25,000 and you file as a single, individual taxpayer. Half or 50% is taxable if your income is in the $25,000 to $34,000 range. Up to 85% of your benefits may be taxable if your total income is higher.
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 the difference between taxable income and earned income? ›
Earned income includes all of the following types of income: Wages, salaries, tips, and other taxable employee pay. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income.
