Knowing what to claim as taxable and nontaxable income can reduce your tax liability. Here’s what you should know.
What’s not taxable
Nontaxable income won’t be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS:
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Inheritances, gifts, and bequestsCash rebates on items you purchase from a retailer, manufacturer, or dealerAlimony payments (for divorce decrees finalized after 2018)Child support paymentsMost healthcare benefitsMoney that is reimbursed from qualifying adoptionsWelfare payments
Under certain circumstances, the following items may be nontaxable. TurboTax can help you determine what should be included in your return.
Money you receive from a life insurance policy when someone dies is not taxable. However, if you cash in a life insurance policy, then a portion, if not all of it, is likely taxable.Money from a qualified scholarship is not taxable. However, if you use the money for room and board, or use it to pay other personal expenses, that portion is normally taxable.
Compensation
Generally, income can be received in three ways: money, services, and property. But, you can also pay tax on income not yet in your possession. For example, if you receive a check but don’t cash it by the end of the tax year, it is still considered income for the year you received the check.
The IRS requires that you declare all income on your return. This can include:
WagesSalariesCommissionsStrike payRental incomeAlimony (for divorce decrees finalized before 2019)Royalty paymentsStock options, dividends, and interestSelf-employment income
Typically, unemployment compensation is also considered taxable income. However, for the 2020 tax year, up to $10,200 of unemployment benefits can be excluded from income. If you are married, each spouse can exclude this amount. Amounts over this remain taxable and if your modified adjusted gross income (AGI) is greater than $150,000 then you can’t exclude any unemployment compensation.
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Income from fringe benefits
If you receive fringe benefits for services you render, they are usually considered taxable income, even if someone else receives them, such as your spouse. These taxable benefits and perks may include:
A company-paid off-site gym membershipA company vehicle for personal useHoliday gifts in the form of cash or gift certificates from your employerA certain portion of employer-paid dependent careCompany-paid tuition fees over a certain amountCompany-paid financial counseling feesEmployer-paid group life insurance over a certain amount
Miscellaneous income
Income that may not be readily identified as taxable but generally must be included on your tax return includes:
Employer contributions to an unqualified retirement planThe fair market value of property received for your servicesDisability retirement payments from an employer-paid planSickness and injury payments from an employer-paid planProperty and services for which you barteredMoney and income from offshore accountsThe remaining amount of a debt or loan that is canceled or forgiven
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax, you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.
