Monday, February 23, 2015

Taxable or Not – What You Need to Know about Income

ALL INCOME IS TAXABLE UNLESS THE LAW SPECIFICALLY EXCLUDES IT. That's the starting place for understanding what the IRS counts as income. Here are some basic rules to help you file an accurate tax return:

Taxed income. Taxable income includes money you earn, like wages and tips. It also includes bartering, an exchange of property or services, and the fair market value of property or services received.

Some types of income are not taxable except under certain conditions, including:

Life insurance. Proceeds paid to you because of the death of the insured person are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that you get that is more than the cost of the policy is taxable.

Qualified scholarship. In most cases, income from scholarships is not taxable. Specifically, this means that amounts you use for certain costs, such as tuition and required books, are not taxable. On the other hand, amounts you use for room and board are taxable.

State income tax refund. If you got a state or local income tax refund, the amount may be taxable IF you itemized your deductions in the prior year. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

Gifts and inheritances are not taxed to the recipient.

Child support payments are not taxed and are not deductible. Alimony, on the other hand, is taxable income and a tax deduction to the payer

Welfare benefits

Damage awards for physical injury or sickness. Punitive damages usually are taxable.

• Cash rebates from a dealer or manufacturer for an item you buy

• Reimbursements for qualified adoption expenses

For more on this topic see Publication 525, Taxable and Nontaxable Income. You can get it on anytime.