Taxable and Nontaxable Income

Taxable and Non-taxable Income Income can be in the form of money, goods, services, or property. Establishing what falls under taxable income or non-taxable income can be a little bit confusing for some people. Although most income received is taxable, there are certain types of income, which are not. Taxable income comprises all income you receive during the tax year that tax law does not specifically exempt from income tax. All such income is subject to income tax, regardless of whether the income was received in the form of cash or in the form of non-cash property. Taxable income Typically, taxable income will comprise the following:  Wages, salaries, tips, and other employee compensation.  Income from self-employment.  Taxable interest.  Ordinary and qualified dividends.  Taxable refunds of state and local income taxes.  Alimony received.  Capital and other gains.  IRA distributions.  Pensions and annuities.  Income from real estate rental.  Income from royalties.  Income from partnerships, S corporations, and trusts.  Income from farming.  Unemployment compensation.  Some Social Security benefits.  Canceled debt.  Some income from court award and damages (see below).  Income from all other sources, that are not tax exempt. You report all your taxable income (both earned and unearned) on lines 7 through 21 of Form 1040. Income is constructively received (and taxable) when it is made available to you without restrictions, even though it does not have to be in your possession. Examples of situations in which income is constructively received include the following:  Interest credited to your bank account, regardless of when the funds are withdrawn.  Your debts that are forgiven or paid by someone else (if it was not a gift or loan).  Payments received by your agent on your behalf.  A check received or made available to you.  Your wages that are garnished. These are treated as been constructively received by you.  Income you receive in advance, such as rents, interest, and pay for services to be performed later. Nontaxable income

Nontaxable or tax exempt income is income that is not subject to income tax, and includes the following:  Child support.  Federal tax refunds.  Interest on state or local government obligations, such as municipal bonds.  Welfare and other public assistance benefits.  Workers’ compensation and similar payments for sickness and injury.  Meals and lodgings provided by your employer. These will be excluded from your taxable income if: (a) the meals are furnished on your employer’s business premises, (b) the meals are furnished for the convenience of your employer, and (c) the lodging is required for employment.  Employee achievements awards.  Employer contributions to a medical savings account.  Most life insurance proceeds received by beneficiaries upon death of the policyholder.  Accident and health insurance proceeds.  Casualty insurance.  Education assistance program. Your employer must exclude from your taxable income, the first $5,250 of any qualified educational assistance paid to you each year. The payments do not have to be for work-related courses and can be for both undergraduate and graduate-level courses. Educational assistance includes payments for: tuition, fees and similar payments, books, supplies, and equipment. Educational assistance does not include expenses for meals, lodging, and transportation.  Part or all of social security benefits.  Part of scholarships and fellowship grants. Only a candidate for a degree program can exclude from income amounts received as a qualified scholarship. The amounts excluded must be for tuition and fees, books, supplies, and equipment required for courses. Any amounts received for room and board are taxable.  Housing allowances for members of the clergy.  Veterans’ disability benefits. Allowances paid by the department of Veterans Affairs are not included in taxable income.  Military allowances.  Gifts, bequests, inheritances (these may be subject to other taxes, such as gift tax).  Disaster relief grants.  Damages for physical injury or sickness.

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