Taxable and Nontaxable Income – What’s the Difference?

9 - red stencilIRS Tax Tip #9 from Carpenter, Evert and Associates – Taxable Income and Nontaxable Income

IRS Tips about Taxable and Nontaxable Income – Are you looking for a hard and fast rule about what taxable income and what is nontaxable income? The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages and tips. Taxable income can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.Taxes - white note with pushpin

Some types of income are nontaxable income except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are nontaxable income. However, amounts you use for room and board are taxable income.
  • If you got a state or local income tax refund, the amount may be taxable income. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that usually qualify as nontaxable income:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses

For more on this topic see Publication 525, Taxable Income and Nontaxable Income. You can get it at IRS.gov or call to have it mailed at 800-TAX-FORM (800-829-3676).

Carpenter, Evert and Associates Top Ten Tax Tips for 2014:

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  2. Are you Eligible for the Earned Income Tax Credit?
  3. Tax Return Information is Now at Your Fingertips  
  4. Don’t Miss Out on Important Tax Credits
  5. Tax Benefits for Parents
  6. How Will the Affordable Care Act Affect Your Taxes?
  7. Do you Know Your Tax Filing Status?
  8. What to Know About Declaring your Tips 
  9. Taxable and Nontaxable Income – What’s the Difference? 
  10. Tax Deductions for Charitable Contributions

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