Most income you receive is taxable and must be reported on your federal income tax return. However, some types of income are either partially taxable or completely excluded from federal income tax.
As a general rule, if money, property, services, or benefits increase your financial position, they're likely taxable unless the law specifically excludes them.
Common Types of Nontaxable Income
The following items are generally not included in taxable income:
- Adoption assistance reimbursements for qualified adoption expenses
- Child support payments you receive
- Gifts, bequests, and inheritances
- Workers' compensation benefits for job-related injuries or illnesses
- Meals and lodging provided for your employer's convenience
- Compensatory damages received for a physical injury or physical sickness
- Welfare benefits
- Cash rebates from a manufacturer or dealer
Keep in mind that some types of income may be taxable in one situation but tax-free in another. The tax treatment often depends on how the income was received and how the funds were used.
Is Life Insurance Taxable?
Usually, life insurance death benefits paid because of the insured person's death are not taxable.
However, you may owe tax in certain situations:
- If you surrender a life insurance policy for cash, any amount you receive above your total cost (basis) in the policy is generally taxable.
- If a life insurance policy was transferred to you for valuable consideration (purchased from someone else), part of the death benefit may be taxable.
If you're unsure how a life insurance payout should be reported, review the details of the policy or consult the applicable IRS guidance.
Are Scholarships and Fellowship Grants Taxable?
If you're a candidate for a degree, you may be able to exclude qualified scholarship or fellowship amounts from your taxable income.
Generally, scholarship funds used for qualified education expenses, such as:
- Tuition
- Required fees
- Books
- Supplies
- Course-required equipment
can be excluded from income.
However, amounts used for personal living expenses, including room and board, do not qualify for the exclusion and are generally taxable.
Other Taxable Income You Must Report
Unless a specific tax law excludes it, income must be reported on your return. Common taxable income includes:
- Wages
- Salaries
- Tips
- Bonuses
- Self-employment income
- Interest and dividends
- Certain retirement distributions
If you're unsure whether income is taxable, it's usually best to review the IRS rules before filing.
Bartering and Other Non-Cash Income
Taxable income isn't always paid in cash.
For example, bartering occurs when two parties exchange goods or services instead of money. In most cases, both parties must include the fair market value of the property or services received in their income.
The value of what you receive through a barter exchange is generally taxable and should be reported on your Form 1040.
Learn More About Taxable and Nontaxable Income
The examples above are not a complete list of taxable and nontaxable income.
For more details, visit IRS.gov and review Publication 525, Taxable and Nontaxable Income, or order federal tax forms and publications by calling 800-TAX-FORM (800-829-3676).