Understanding Taxable and Nontaxable Income
When it comes to filing your taxes, it’s important to know what income is taxable and what income is not. The IRS has specific guidelines on what types of income should be included on your tax return. Here are some key takeaways:
Taxable Income
Income received as wages, salaries, commissions, rental income, royalty payments, stock options, dividends and interest, and self-employment income are all considered taxable. Additionally, unemployment compensation is generally taxable, except for a portion that can be excluded for the 2020 tax year.
Nontaxable Income
On the other hand, there are certain types of income that are deemed nontaxable by the IRS. These include inheritances, gifts, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, money reimbursed from qualifying adoptions, and welfare payments.
Money from a qualified scholarship is also nontaxable, unless it is used for room and board or other personal expenses. Additionally, certain circumstances may make other items nontaxable, such as life insurance proceeds received upon someone’s death.
Other Taxable Income
It’s important to note that income can be received in various forms, including money, services, and property. Even if you haven’t cashed a check by the end of the tax year, it is still considered income for that year. The IRS requires that all income be declared on your tax return.
Other forms of taxable income can include alimony (for divorce decrees finalized before 2019), fringe benefits received for services rendered, and miscellaneous income such as employer contributions to an unqualified retirement plan, property received for services, and income from offshore accounts.
Understanding what income is taxable and what is not can help you accurately report your income and avoid any potential tax issues. If you have specific questions or need assistance, it’s always a good idea to consult with a tax professional.