What's Taxable and What's Not

Income is more than just the salary you draw from your job or the revenue you generate from your business. It can be in the form of money paid to you, property given to you or services that you receive. As such, your income can be drawn from various sources and while income is generally subject to tax, there are some (thankfully!) that are not. Here are some examples of income that are not subject to tax.

1. Child support – if you receive compensation from your ex-spouse to raise your children, the law defends you and exempts this income from tax.

2. Gifts and inheritances – a next-of-kin who bequeaths something of value to you in his or her will would pay estate duty tax and likewise a person who gives you a gift of value pays taxes out of his or her income. Therefore, if you receive a sum of money as an inheritance or as a gift, this money is taken as already-taxed money and will be excluded from tax.

3. Awards for damages for physical injury or illness – if you win a court decision for compensation for physical injury or illness, you will not have to pay taxes on the amount of damages you receive. Again, this is due to the double taxation principle as the amount of damages given to you is already subject to tax.

4. Welfare benefits – if you live on welfare, you will not be earning enough to be taxable.

5. Rebates for purchases – if you buy something at a discount, the amount you save is not considered taxable income.

6. Reimbursement for qualified adoption expenses

There are other forms of income that are exempted from tax under specified conditions. Here are examples of these types of income.

• Life insurance benefits

If you are the beneficiary of a life insurance policy, you will not be taxed on the payment when the policy becomes payable upon expiry of the policy (usually at death or total permanent disability of the life insured). But if you terminate the policy prematurely, the cash value you receive is taxable.

• Scholarship payments

Payments from a qualified scholarship are not taxable if they are used for required expenses like course fees and books. But if the money is for accommodation like room and board, it is taxable.

• Other income specifically mentioned in the law

Generally, only income specified in the law as non-taxable is exempted from tax. All other income on which the law is silent, such as income from a garage sale, tips from being a waiter etc are subject to tax. Even non-cash income, like in the case of bartering (exchanging of property or services) is taxable. You must include the fair market value of goods or services received as income on your tax return.

Be Sociable, Share!
  • more Whats Taxable and Whats Not

Filed under IRS Problems by  #