A taxpayer can reduce the tax liability when he/she knows what to claim as taxable and nontaxable income. A person can receive income in many forms such as salaries, wages, tips, interests, and commissions. According to accountant Caroline Thompson, “Consider all the income that increases the wealth as taxable”. Apart from that, there is little left out to be nontaxable. The government lists the items that are not taxable and mentions the circumstances when the items occur under non-taxable income.
Taxable and Nontaxable Income
What is not taxable?
The income that comes under Nontaxable income will not be taxed, even if you enter it on the tax return. The IRS deemed the following items as nontaxable:
- Gifts, bequests, and Inheritances.
- Cash discounts on purchased items from a manufacturer, retailer or dealer.
- Child support payments.
- Healthcare benefits
- Reimbursed money from qualifying adoptions.
- Welfare payments.
The following items may also be nontaxable under certain circumstances.
- Received money from the life insurance policy when someone dies is not taxable. But, it is taxable when you cash in the life insurance policy.
- Money received from a qualified scholarship is not taxable. It is taxable when you use the money for board and room.
A person can receive income in three ways: services, money, and property. A person can pay the tax on the income, which is not yet in the possession. For instance, when you receive a check but did not cash the amount until the end of the tax year, it is also considered as an income for the tax year.
Income should be stated as gross income on the return. This may include the following:
- Babysitting fees
- Rental income
- Royalty payments
- Stock options, dividends, and interest
- Strike pay
- Unemployment compensation
Income from fringe benefits
When you receive the fringe benefits for your services, they are also considered as taxable income, even though it is received by someone else, maybe your partner. The perks and taxable benefits include the following:
- Company’s vehicle for personal use.
- The company paid off-site membership of the gym.
- Employer’s holiday gifts in the form of gift certificates or cash to the employees.
- Employer-paid dependent care covers certain portion.
- Company-paid certain amount of tuition fees.
- Financial counseling fees paid by the company.
- A Certain amount of group life insurance paid by the employer.
There is miscellaneous income, which cannot be identified as taxable income and should be included on the tax returns are included in the following list:
- Contributions of the employer to an unqualified retirement plan.
- The fair value of the property received for the services you provided.
- Disability retirement payments from the paid plan of an employer.
- Injury and sickness payments from the paid plan of an employer.
- Services and property for which you bartered.
- Income and money from offshore accounts
- Forgiven or canceled, a remaining amount of loan or a debt.
- Hostess or host gifts for home sale parties.
Hope this article gave an outline of the taxable and nontaxable income. Hence before filing your tax returns make sure to check the above list to get a better understanding of the types of income.