What Is Taxable Income?
While taxable income can include wages, salaries, bonuses, commissions and tips, it may not be as easy to define as you might think.
Key Takeaways
- Taxable income encompasses a wide range of earnings beyond typical wages, including fees for jury duty, acting as an executor or trustee, and serving on a board of directors.
- Certain types of income are not subject to federal taxes, such as life insurance proceeds received as a beneficiary, child support payments, and workers' compensation.
- Special rules apply to the taxation of capital gains from the sale of a primary residence. If you've lived in the home for at least two of the five years prior to the sale, the gain is exempt up to $250,000 for single filers and $500,000 for married couples filing jointly.
- Income from interest on municipal bonds issued in your state is typically not taxable. However, interest from U.S. government bonds is taxable at the federal level.
Figuring out taxable income
This question isn’t as easy to answer as you might think. Most people realize that taxable income includes wages, salaries, bonuses, commissions and tips. But as you can see from this list, "income" means a lot more than that to the IRS.
Taxable income includes
- fees for acting as an executor, trustee or estate administrator
- fees for jury duty
- fees for serving on a board of directors
- security deposits you received from a tenant
- constructively received income - income that was available to you, even if it wasn't in your possession. Let's say you received a check in late December but didn't deposit or cash it until January of the next year. You still must include the check in your taxable income for the year that you received the check, not the year that you deposited it.
- assignment of income - if you've authorized someone to receive income on your behalf, it's includable in your income as soon as your agent receives it
- alimony you receive from your ex-spouse for agreements entered into before 2019
- cancelled debts - except in cases of bankruptcy or insolvency, see below
- awards, prizes and contest winnings
- back pay, including amounts you received as the result of a successful suit for age discrimination
- severance pay
- strike benefits
- unemployment benefits
- capital gains - there’s an important exception when it comes to the sale of your primary residence - see below
- freelance income
- interest and dividends
- profit on a sale
- royalties and license receipts
- value of bartered services
- gambling, lottery, raffle, and sweepstakes winnings
- money you embezzled - that's right, the amount you embezzle is taxable in the year you steal it
TurboTax Tip:
Canceled debts can be excluded from taxable income if they were discharged in bankruptcy or due to insolvency, providing relief in specific financial hardship situations.
Taxable income doesn't include
Now the good news. You typically don't owe Uncle Sam income taxes on:
- life insurance proceeds - if you're the beneficiary, the benefit isn't taxable to you
- child support payments
- accident and personal injury awards
- worker's compensation payments
- disability benefits, if you paid the premiums for the policy. If your employer paid for the policy, the disability payments are taxable.
- Iiterest income on municipal bonds issued in your state. (By contrast, interest on U.S. government bonds is federally taxable even though it isn't usually subject to state income taxes.)
- canceled debts that were discharged because of your bankruptcy or insolvency
- scholarships and fellowship grants if used to pay for tuition
- foster care payments
- Social Security benefits, depending on your income
- capital gain on the sale of your primary residence, which is a house you’ve owned and lived in for two of the five years prior to the sale. This gain is tax-exempt, except to the extent that it exceeds $250,000 if you're a single taxpayer or $500,000 if you're married filing jointly. There are restrictions, however, if your home has been used as a rental property or a home office.
- gifts you received as a present
- inherited assets, except to the extent that they would have been taxable income to the person from whom you inherited them. If you inherit an Individual Retirement Account, for example, the account balance is tax-deferred, but you owe taxes on the distributions you take from that account in the year you take them—just as the original IRA owner would have done.
- money that you rolled from one retirement account to another in a trustee-to-trustee transfer
- your federal income tax refund - the money you got back from Uncle Sam is not taxable as income
If you’re in doubt about whether some of your income is taxable, don’t guess! Take the time to double-check. You’ll find more information in IRS Publication 525, "Taxable and Nontaxable Income."
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