The Art of Incomeincome, your tax return | September 07, 2015 | By Bob Williams
The old line that our friends at the IRS like to throw around is, “All income is taxable – unless the law specifically excludes it.”
And while the first part of that quote is generally the way many of us view the income tax process, truth is, there is such a thing as non-taxable income. And it can pay to know the difference between the two.
Taxable income includes money you receive, such as from wages and tips. It can also include noncash income from property or services. That’s why both parties in a barter exchange have to include the fair market value of goods or services received as income on their tax returns. Even though actual money may not be involved, income will.
While we have to follow the old adage of “Never say never,” we can say that some flavors of income are not taxable … usually. These include:
- Gifts and inheritances
- Child support payments you receive
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you bought
- Reimbursements for qualified adoption expenses
Some types of income aren’t taxable except in certain conditions. Some examples:
- Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income from a qualified scholarship is not taxable normally. Amounts that you use for certain costs – such as tuition and required books – are not taxable. But if you use part of that scholarship money for room and board, then that amount is taxable.
- Did you get a state or local income tax refund last year? That refund could be taxable. You should have gotten a Form 1099-G from the agency that sent you the refund. If you didn’t get one by mail, the agency may have provided the form electronically. Contact them to find out how to get the 1099. The best advic: Report ANY taxable refund you got – even if you didn’t get a 1099-G for it.
All this leads us to the next issue: where to report your income on your income tax return:
- When you're doing your taxes online, the best rule of thumb is to use the same form in your tax return that was used to report the income to you. So if you got a W-2, use that screen in your return. The same goes with any kind of 1099 or 1098 form.
- Did you have income from some other source – but have no paperwork to show for it? Depending on the source, you may be able to use Form 1099-MISC, Miscellaneous Income, or Form 1040 – Income.
- Other often-used income forms include the Schedule E for rent income, and Schedule F for farming.
Still curious about that whole taxable-versus-nontaxable thing? Check out Publication 525 – Taxable and Nontaxable Income from the IRS.