Tax Tips: Do You Know the Difference Between Taxable and Nontaxable Income?

All income you receive is taxable unless the rules explicitly state that it isn’t. According to the IRS, taxable income includes earned income, like wages, as well as any income earned by bartering or the exchange of property or services. Rental income is taxable, as are other forms of unearned income, like interest and dividends or Social Security.

Some income is not taxable unless certain conditions are met. For example, life insurance proceeds are usually not taxable to the beneficiary unless you redeem a life insurance policy for cash. Any amount you receive above the cost of the policy is taxable. State and local income tax refunds may be taxable and should be reported on your federal taxes.

There are also some forms of income that are usually not taxable:

    • 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.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

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