Updated for tax year 2023.
If you receive money, goods, or services, it’s likely considered taxable income. This is true for any money you earn, as well as interest and dividends you receive on your investments. You are required to pay taxes on all income unless the Internal Revenue Service (IRS) specifically calls out a type of income as nontaxable.
Here’s a quick breakdown of various forms of income you may receive, and whether they’re generally taxable or nontaxable.
Earned income
Taxable:
You pay tax on wages, salaries, and tips.
Bonuses are taxableand included on yourForm W-2. Cash paid “under the table” is also taxable, even if you do not receive aForm 1099-NECto report it.
Jury duty pay may not amount to much, but it’s still taxable unless you turn it over to your employer in exchange for continuing to receive salary pay.
Earned income is taxable even if it’s generated from your favorite hobby. However, you cannot deduct expenses fromhobby incomelike you would for business expenses.
Nontaxable:
Your employer can provide benefits that you don’t have to include in taxable income. For example, the cost of life insurance up to $50,000, qualified adoption assistance, child and dependent care benefits, and contributions you make to health insurance may not be subject to taxes.
Income given or paid to you by other people
Taxable:
Any court awards you receive for lost pay and punitive and business damages are subject to taxes.
Nontaxable:
Gifts, regardless of size, are not generally taxable to the recipient. The donor can gift up to $17,000 in 2023 (increasing to $18,000 in 2024) without filing a gift tax return as well.
Combat pay and child support are more examples of nontaxable income.
Alimony payments do not have to be reported as taxable income for divorce or separation agreements finalized Jan. 1, 2019, or later.
Damages you receive for physical injury, sickness, or emotional distress (as long as you did not take an itemized deduction for medical expenses related to the injury or sickness in prior years) are also not taxable. However, you must include in your income the portion of the settlement that is for medical expenses you deducted in any prior year to the extent the deductions provided a tax benefit.
Retirement and disability income
Taxable:
You pay tax on retirement and disability income if you did not already pay tax on contributions, or if you did not pay the premiums to receive income.
You must pay tax on withdrawals from a traditional IRA or 401(k) plan because you made pre-tax contributions to the plan. You also pay tax on disability benefits for which your employer paid the premiums.
Up to 85% of yourSocial Security incomemay be taxable if your income is above certain levels.
Nontaxable:
You don’t pay tax on disability income if you paid the premiums yourself, or if the benefits are connected to government service.
You also don’t pay tax on withdrawals from Roth IRA or 401(k) retirement plans since you already paid tax when you made the contributions to those types of accounts.
If you rely mostly on Social Security benefits for income, your benefits may not be taxable depending on your income amount and whether you file as single or married filing jointly.
Investment income
Taxable:
Interest and dividends are taxable income, unless specifically exempt.
Nontaxable:
Municipal bonds are nontaxable on your federal return. Any dividends that are a return of capital are also not subject to taxes, as opposed to dividends that are a share of profits.
Income from the sale of assets
Taxable:
Your gain from thesale of an assetis generally taxable. Your gain is typically your basis (the amount you paid for an asset), minus the amount you received when you sold it.
For example, if you buy a stock for $100 and sell it for $200 (after selling expenses), you have a $100 gain ($200 – 100 = $100). You also pay tax on your gain from selling business property, stocks and bonds, investment real estate,collectibles, andpersonal itemsthat have gone up in value.
You may need to adjust your basis for other items. For example, you reduce your basis for any depreciation you take on a business asset. You increase your basis (and reduce your gain) for additional expenses, such as major improvements.
Nontaxable:
One nice tax break available to homeowners is when yousell your home, you may not have to pay tax on the first $250,000 of gain ($500,000 if filing jointly). You must have owned and lived in the home for two of the last five years to have this gain be nontaxable, and you must not have taken this exclusion in the two-year period before the sale of the home.
If you receive money from a garage sale, you typically do not need to report the sales because most garage sale items are sold for less than their original cost. You only need to pay taxes on any profits you make from reselling.
Other income
Taxable:
Gambling winningsare taxable. However, you candeduct gambling lossesif you itemize your deductions.
Unemployment incomeisalso fully taxable.
Nontaxable:
If you receive an inheritance, it is not taxable. The person’s estate pays estate and inheritance taxes before it gives money to any heirs. But, if there is interest or other income generated from inherited cash, it is taxable.
