Most of the income we receive is taxable, but certain types of income are only partially taxed or not taxed at all. The following are some of the more common types of income that individuals receive and an indication of how they are treated for federal income tax purposes.
Adoption Expense Reimbursements: Taxpayers adopting a child can exclude from taxable income adoption expenses paid by their employer under the employer’s adoption assistance program. The exclusion is limited to a maximum amount, and also by adjusted gross income.
Alimony: Payments properly classified as alimony must generally be included in taxable income by the recipient.
Cash Rebates: Cash rebates from a dealer or manufacturer on an item you purchase are not taxable income. However, the basis of the property must be reduced by the amount of the rebate.
Child Support Payments: Child support payments are generally not taxable to the recipient.
Gambling Winnings: You must include gambling winnings in income. If you itemize your deductions, you can deduct gambling losses you had during the year, but only up to the amount of your winnings.
Life Insurance: Life insurance proceeds you receive as a beneficiary because of an insured person’s death generally are not taxable. However, if you surrender a life insurance policy for cash, any proceeds received in excess of the premiums paid for the policy are taxable.
Lotteries and Raffles: Winnings from lotteries and raffles are gambling winnings (see above). In addition to cash winnings, the fair market value of noncash prizes is considered to be taxable income.
Noncash Income: Taxable income may be received in a form other than cash. A good example of this is bartering income where property or services are exchanged.
Property Damage: Payments you received for property damage are not taxable if the payments are not more than your adjusted basis in the property. If the payments are more than your adjusted basis, you will realize a taxable gain.
Scholarships and Fellowships: Degree candidates can exclude amounts received as scholarships or fellowships from taxable income. However, amounts received for room and board generally do not qualify for exclusion.
Utility Rebates: If you participate in an electric utility’s energy conservation program, you may receive a rate reduction or a refundable credit toward the purchase of electricity. The amount of the rate reduction or nonrefundable credit is not includable in taxable income.
Worker’s Compensation Benefits: Amounts received by an employee as compensation under state or federal worker’s compensation acts for personal injuries or sickness incurred on the job are not generally taxable, unless the amounts received offset previously deducted medical expenses.
These are some common forms of income questions that may arise regarding inclusion or exclusion for federal tax purposes. Please contact us if you have any questions regarding income classification or any other tax compliance or planning issue.