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 nontaxable 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 3 things must you know to determine your taxable income? ›
- Step 1: Determine Your Filing Status. First, determine your filing status. ...
- Step 2: Consider Your Types of Income. The IRS requires you to report all of your income. ...
- Step 3: Calculate Deductions and 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.
Taxable income starts with gross income, and 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.
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 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 do I owe taxes when my taxable income is zero? ›
Sounds like you have self-employment tax for the consulting income. That is for Social Security and Medicare. You have self-employment income for which you will pay self-employment tax for Social Security and Medicare.
How to report non-taxable income? ›
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 benefits are nontaxable? ›
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.
Interest income from municipal bonds is generally not subject to federal tax.
- Invest in Municipal Bonds. ...
- Shoot for Long-Term Capital Gains. ...
- Start a Business. ...
- Max Out Retirement Accounts and Employee Benefits. ...
- Use a Health Savings Account (HSA) ...
- Claim Tax Credits.
Although your pretax 401(k) contributions are tax deductible today, you'll eventually have to pay taxes on the money. It's important to be aware of your marginal tax bracket, because any 401(k) withdrawals that aren't rolled over into a qualified plan or IRA will be treated as regular 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 calculate the taxable income? ›
Steps to Calculate Taxable Income
- Calculate Gross Salary. Add up all the salary components, along with Form 16 for the previous fiscal year and add every emolument.
- Deduct Non-taxable Portion of Allowances. ...
- Deduct Professional Tax and Standard Deduction. ...
- Include other Income.
Disability benefits
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.
Why is it important to calculate taxable income? ›
Also, understanding taxable income can help you figure out how much tax you will owe, if any, and might help lower your tax bill. The most common taxable income for many people is earned income (e.g., from wages, tips, bonuses, etc.).
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.
Are taxable income and income tax the same thing? ›
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.
Which of these examples is taxable income? ›
Money earned through a salary, wages, and self-employment income are some of the most common types of taxable income. Other types include royalties, commissions, rental income, and strike pay.
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.
