Taxable Income vs. Nontaxable Income: What You Should Know (2024)

Knowing what to claim as taxable and nontaxable income can reduce your tax liability. Here's what you should know.

Taxable Income vs. Nontaxable Income: What You Should Know (1)

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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Taxable Income vs. Nontaxable Income: What You Should Know (2024)

FAQs

Taxable Income vs. Nontaxable Income: What You Should Know? ›

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? ›

  • 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.

What is the difference between taxable income and nontaxable income? ›

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.

How do I know if I have non taxable 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 I know what is taxable 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.

What are the 4 types of taxable income? ›

Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.

What is taxable income for dummies? ›

Taxable income is the amount of your income that is subject to taxation. Common types of taxable income include salary, wages, tips, bonuses and employer-provided benefits. Some kinds of income may not be taxable, though, like employer-sponsored health insurance and child support payments.

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.

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 item should not be included in income? ›

Income excluded from the IRS's calculation of your income tax includes life insurance death benefit proceeds, child support, welfare, and municipal bond income. The exclusion rule is generally, if your "income" cannot be used as or to acquire food or shelter, it's not taxable.

Can I get a refund if I have no taxable income? ›

Yes, you can still file a tax return even if you have little to no income to report. You may even receive a refund if you qualify for any refundable tax credits.

Is Social Security considered income? ›

You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.

What passive income is not taxed? ›

By keeping assets in tax-deferred accounts like IRAs and 401(k) plans, you won't have to pay tax on your income and gains until you withdraw the money from the account. In the case of a Roth IRA, you may never have to pay tax on your distributions at all.

Is 401k taxable income? ›

Traditional 401(k) plans are tax-deferred. You don't have to pay income taxes on your contributions, though you will have to pay other payroll taxes, like Social Security and Medicare taxes. You won't pay income tax on 401(k) money until you withdraw it.

What is taxable income for a business? ›

Simply put, a company is taxed on the profit it makes after all allowable deductions are subtracted from its revenues. You can think of it like a formula: Revenues – Deductions = Taxable Income.

Is net income and taxable income the same? ›

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 are the 3 main types of income taxes? ›

All taxes can be divided into three basic types: taxes on what you buy, taxes on what you earn, and taxes on what you own. Every dollar you pay in taxes starts as a dollar earned as income. The main difference is the point of collection.

What are the 3 types of taxes that you might find on your paycheck? ›

They consist of federal income tax, Federal Insurance Contributions Act (FICA) tax (Medicare and Social Security) and state income tax.

What are 3 things taxes pay for? ›

Mandatory spending includes entitlements like Social Security, Medicare, Medicaid, and Veterans Affairs benefits and services. They're called entitlements because the government takes money out of your paycheck to fund them, so you're entitled to these benefits once you meet certain conditions.

What are the four steps to calculating your taxable income? ›

  1. Steps. ...
  2. Step 1 (Determining Gross or Total Taxable Income) ...
  3. Step 2 (Calculating Adjusted Gross Income (AGI)) ...
  4. Step 3 (Subtracting Deductions) ...
  5. Step 4 (Claiming Your Exemptions) ...
  6. Step 5 (Calculating Your Taxable Income, and from That, Calculating Your Base Income Tax)

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