In general, income can be received in three ways – money, services, and property – and IRS requires you to declare most of this income on your tax return. Income is taxable unless specifically exempted by law, and in some cases, even nontaxable income must be disclosed on your tax return.
Taxable Income
Typically, the following types of income are required to be declared on your tax return, and you must pay tax on them:
- Wages
- Salaries
- Commissions
- Strike pay
- Rental income
- Alimony (for divorces finalized before 2019)
- Royalty payments
- Gains on stock sales
- Dividend and interest income
- Self-employment/business income
Keep in mind that there are other forms of compensation that may be taxable, including fringe benefits or stock options. Fringe benefits are part of your income unless they are specifically excluded by law – or, if you pay fair market value for them. You do not need to be an employee of the provider of such a benefit to be a recipient, and if you perform the services for which a fringe benefit is being provided, you are the recipient and required to report/pay tax on it as applicable, even if it is given to another person and not you (for example, a family member). Examples could include:
- A company-paid offsite gym membership
- A company vehicle that can be used personally
- Holiday gifts from an employer in the form of cash or gift certificates
- Company-paid tuition exceeding a certain amount
- Employer-paid group life insurance over a certain amount
Nontaxable Income
The following types of income are usually deemed nontaxable by IRS and aren’t required to be reported on your tax return:
- Inheritances and bequests
- Cash rebates
- Alimony payments (for divorces finalized after 2018)
- Child support payments
- Most healthcare benefits
- Money that is reimbursed from qualifying adoptions
- Welfare payments
Other Considerations
There are some types of income that may or may not be taxable, or may be partially taxable. Examples include proceeds from cashing in a life insurance policy or money from a qualified scholarship, depending on how it was used. Income from retirement accounts may also fall into this category. Consult with your tax professional to determine how much of such income should be included on your tax return, if any.
- Certain types of income may not be readily identified as taxable, but are generally required to be included on your return. Examples include the fair market value of property received for your services; disability retirement or sickness/injury payments from an employer-paid plan; property and services for which you bartered; money/income from offshore accounts; or canceled/forgiven debt.
- IRS rules state that you are taxed on all income available to you, regardless of whether it is actually in your possession. For example, if a check is received by or made available to you before the end of the tax year, but you do not cash or deposit the check until the next year, the income was “constructively received” before year-end and, therefore, is taxable in that year.
- If you have a contract with a third party (agent) to receive income on your behalf, the income is considered received by you (and therefore taxable) in the year the agent received it.
- If you receive payment for future services to be provided, the income is generally included in income/subject to tax in the year you receive it. An exception to this is if you report on an accrual basis of accounting – consult with your tax professional for more information.
- Note that in some cases, the tax treatment of certain income for State purposes is not consistent with Federal tax law. For example, while alimony is no longer reportable on Federal returns for divorces finalized after 2018, California still requires such income to be included on the state tax return. Check with your tax professional to learn more about federal and State tax law differences.
For more information, please refer to IRS Publication 525, Taxable and Nontaxable Income: 2022 Publication 525 (irs.gov)