You can receive income in the form of money, property or services. Although most income you receive is taxable and must be reported on your federal income tax return. There are some instances when income is specifically exempted by law and not taxable. Some income may still need to be shown on your tax return even though it is not taxable, while some may only be partially taxed. One thing is for sure – knowing the difference could be the key to reducing your tax liability.
The IRS offers the following list of items that do not have to be included as taxable income:
- Adoption expense reimbursements for qualifying expenses
- Child support payments
- Gifts, bequests and inheritances
- Workers’ compensation benefits (some exceptions may apply)
- Meals and lodging for the convenience of your employer
- Compensatory damages awarded for physical injury or physical sickness
- Welfare benefits
- Cash rebates from a dealer or manufacturer
Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:
- Life insurance
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
- Scholarship or fellowship grant
If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
- Non-cash income
Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.
All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law. These examples are not all-inclusive.
As always, we are here to help. The key is to bring all relevent documents to your tax appointment. We will help you figure out what income is taxable, which items are not taxable, and help you pay the least amount of tax possible. Call our office today to schedule an appointment.