Knowing what to claim as taxable and nontaxable income can reduce your tax liability. Income can be acquired in many forms, including wages, salaries, interest, tips and commissions. "Consider all money that increases your wealth as taxable," advises accountant Caroline Thompson. "There is very little that is nontaxable. The government specifically lists anything that is not taxable and the circumstances that must exist or occur for it to be non-taxed income," she adds.
What's not taxable
Nontaxable income won’t be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS:
- Inheritances, gifts and bequests
- Cash rebates on items you purchase from a retailer, manufacturer or dealer
- Child support payments
- Most healthcare benefits
- Money that is reimbursed from qualifying adoptions
- Welfare payments
Under certain circumstances, the following items may be nontaxable. TurboTax can help you determine what should be included in your return.
- Money you receive from a life insurance policy when someone dies is not taxable. However, if you cash in a life insurance policy, it is taxable.
- Money from a qualified scholarship is not taxable. However, if you use the money for room and board, that portion is taxable.
Income can be received in three ways: money, services and property. You can also pay tax on income not yet in your possession. For example, if you receive a check but don’t cash it by the end of the tax year, it is still considered income for the year you received the check.
Income must be declared as gross income on your return. This can include:
- Unemployment compensation
- Strike pay
- Rental income
- Royalty payments
- Stock options, dividends and interest
- Babysitting fees
Income from fringe benefits
If you receive fringe benefits for services you render, they are considered taxable income, even if someone else receives them, such as your spouse. These taxable benefits and perks may include:
- A company-paid off-site gym membership
- A company vehicle for personal use
- Holiday gifts in the form of cash or gift certificates from your employer
- A certain portion of employer-paid dependent care
- Company-paid tuition fees over a certain amount
- Company-paid financial counseling fees
- Employer-paid group life insurance over a certain amount
Income that may not be readily identified as taxable and must be included on your tax return includes:
- Employer contributions to an unqualified retirement plan
- The fair-market value of property received for your services
- Disability retirement payments from an employer-paid plan
- Sickness and injury payments from an employer-paid plan
- Property and services for which you bartered
- Money and income from offshore accounts
- The remaining amount of a debt or loan that is canceled or forgiven
- Host or hostess gifts for home-sale parties
Get every deduction
TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.