What Is Taxable and Nontaxable Income?

The information in this article is up to date for tax year 2024 (returns filed in 2025).

When you earn money, you’re likely familiar with the fact that you must pay taxes on most of it. However, did you know that not all income is taxable? In fact, certain types of income are nontaxable, meaning even if you report it on your tax return, you won’t owe taxes on it. Understanding which income is taxable and nontaxable can help you manage your taxes more effectively.

Taxable vs. Nontaxable Income

Income can come in many forms—not just as money but also services or property. Knowing what’s taxable and what’s not can make a significant difference when it comes to filing your tax return.

Nontaxable Income

Nontaxable income refers to certain types of income that the IRS does not tax. Below are some common examples:

1. Inheritance
   • Inheritance received from a deceased person is generally not taxed at the federal level. The estate pays taxes before distributing the inheritance, so it doesn’t count as taxable income to the beneficiary.
2. Child Support Payments
   • Money received for the support of a child’s basic needs, such as food, clothing, and shelter, is not taxable to the recipient.
3. Foster Care Payments
   • Payments made to foster parents by government agencies or child placement organizations are nontaxable.
4. Welfare Benefits (SNAP, TANF)
   • Public assistance programs like the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) are nontaxable.
5. Worker’s Compensation
   • If you receive compensation for an illness or injury that is work-related and covered under workers’ compensation laws, it is generally exempt from taxes.
6. Supplemental Security Income (SSI)
   • SSI payments, which are provided to low-income individuals who are either 65 or older, blind, or disabled, are typically nontaxable.
7. Casualty Insurance
   • Insurance claims for accidents or disasters, like a house flood or car accident, are generally tax-free unless the payout exceeds the actual losses incurred.
8. Compensatory Damages for Physical Injury or Illness
   • Damages awarded due to physical injuries or illnesses are usually not taxed. Emotional distress is often nontaxable unless caused by a specific physical injury.
9. Payments from State Crime Victims’ Fund
   • Payments provided to victims of crime by state funds are also considered nontaxable.
10. Disaster Relief Grants
    • Grants used to cover essential expenses following a disaster, such as medical or funeral expenses, are generally tax-exempt.
11. Gambling Winnings (Under Certain Conditions)
    • If your gambling winnings do not exceed your losses, those winnings are not taxable. However, if they do, the full amount is taxable.
12. Life Insurance Death Benefits
    • Death benefits paid out to the beneficiary of a life insurance policy are generally exempt from taxes.
13. Monetary Gifts
    • Gifts received from family or friends are nontaxable. However, if a gift exceeds the annual limit (for 2023, $17,000), the giver may need to pay gift taxes, but the recipient does not.
14. Black Lung Disease Benefits
    • Payments received from the Division of Coal Mine Workers’ Compensation (DCMWC) for black lung disease are nontaxable.
15. Interest on Municipal Bonds
    • Interest earned on bonds issued by state and local governments (municipal bonds) is generally not taxable at the federal level.
16. Combat Pay
    • Military pay earned while serving in a designated combat zone is not taxable.
17. Vacation Rental Income (Limited)
    • If you rent out your personal home for fewer than 15 days during the tax year, the income is nontaxable.

Taxable Income

On the other hand, taxable income is any income subject to taxation by the IRS. Common taxable income sources include:

1. Employee Compensation (Salaries, Wages, Bonuses, Tips)
   • Most employee compensation, such as salaries, wages, tips, and bonuses, is taxable. This is the most common type of taxable income.
2. Fringe Benefits
   • Fringe benefits like company cars, country club memberships, and event tickets are considered taxable income, unless specifically excluded by tax law.
3. Business and Investment Income
   • Income earned from business activities, rental properties, and investments is taxable. For example, rental income must be reported, although you may be able to deduct certain expenses related to the property.
4. Partnership Income
   • While partnerships themselves are not taxed, any income, deductions, or losses from a partnership pass through to the individual partners, who must report it on their tax returns.
5. S Corporation Income
   • S corporations are not taxed directly. Instead, income, losses, and deductions pass through to shareholders, who must report them on their personal returns.
6. Royalties
   • Income from royalties earned on intellectual property, such as patents or copyrights, or from oil and gas extraction, is taxable.
7. Bartering
   • When you exchange goods or services instead of money, the fair market value of what you receive is considered taxable income and must be reported.
8. Digital Currency Income
   • Income from digital currencies, including sales, exchanges, and investments in cryptocurrencies, is taxable.

Now that you understand the difference between taxable and nontaxable income, it’s time to get your taxes filed. Whether you’re filing for the first time or you’re a seasoned pro, ezTaxReturn makes it easy to file your taxes with confidence.

The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.