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.
Typically, taxable income will comprise the following:
Wages, salaries, tips, and other employee compensation.
Income from self-employment.
Ordinary and qualified dividends.
Taxable refunds of state and local income taxes.
Capital and other gains.
Pensions and annuities.
Income from real estate rental.
Income from royalties.
Income from partnerships, S corporations, and trusts.
Income from farming.
Some Social Security benefits.
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
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Interest credited to your bank account, regardless of when the funds are withdrawn.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
Nontaxable or tax exempt income is income that is not subject to income tax, and includes the
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.
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.
Gifts, bequests, inheritances (these may be subject to other taxes, such as gift tax).
Disaster relief grants.
Damages for physical injury or sickness.
If you are serious about doing your own taxes, you will find these two publications to be pretty
helpful: “How To Save Money By Ensuring That Your Tax Returns Have Been Properly
Prepared” and “How To Use Turbo Tax To Confidently Prepare Your Tax Returns.”
Available in Kindle format and in paperback
Visit: www.mgbfinancials.com or visit www.amazon.com