Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.
Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Here are some types of income that are usually not taxable:
- Gifts and inheritances
- Child support payments
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
Under the CARES Act, emergency financial aid grants made to students at a higher education institution because of an event related to the COVID-19 pandemic are not included in the student’s gross income.
In addition, some types of income are not taxable except under certain conditions, including:
- 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 normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
- If you received a state or local income tax refund, the amount might be taxable. You should have received a 2021 Form 1099-G from the agency that made the payment to you. The agency might have provided the form electronically if you didn’t get it by mail. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.
If you have any questions about taxable and nontaxable income, don’t hesitate to contact the office today.