Income: Taxable or Non-Taxable?

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The information in this article is up to date for tax year 2023 (returns filed in 2024).

When you earn money from your job, you’re expected to pay taxes on the income.  But did you know that certain types of income are non-taxable?  That means even if you report it on your tax return, you won’t owe any taxes.  Some examples of non-taxable income are inheritance, child support payments, welfare benefits and worker’s compensation.

Here’s an ez fact: Did you know income isn’t limited to money? It can also be a service or property.

Below is a list of non-taxable and taxable income. 

Non-taxable income

• Inheritance

Inheritance from a deceased person is usually exempt from federal taxes since the estate pays all the taxes before the inheritance is issued.

• Child Support Payments

Any money received to cover the child’s basic needs such as food, clothing and shelter is not taxable.

• Foster Care Payments

Foster care payments from a child placement agency or any type of government is not taxable.

• Welfare Benefits Payments (SNAP or TANF)

Payments provided by the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF) are not taxed by the IRS.

• Worker’s Compensation

Compensation for an employment-related illness or injury is exempt from taxes if payments are made under a workers’ compensation act.

• Supplemental Security Income (SSI) payments

SSI payments are not taxable as they provide monthly benefits to low-income people who are either 65 or older, blind, or disabled.

• Casualty Insurance

Casualty Insurance claim because of a car accident, house flood, etc. are tax-free unless the payments exceed actual losses.

• Compensatory Damages for Physical Illness, Physical Injury or Emotion Distress

Damages awarded for physical injury, physical illness, or emotional distress are typically exempt from taxes.

• Payments from State Crime Victims’ Fund

Payments from a state fund for the victims of crime are nontaxable income.

• Disaster Relief Grants

Disaster relief grant payments utilized to address essential expenses for medical, dental, personal property, transportation, or funeral expenses, are exempt from taxes.

• Gambling Income

If your gambling winnings does not exceed your losses, the income is non-taxable.

• Life Insurance Death Benefits

Death benefits received by the beneficiary of a life insurance policy is not taxable.

• Monetary Gifts (From Friends or Family)

Monetary gifts received from a relative or friend are nontaxable. If the gift is more than $17,000 for 2023, the giver may owe gift tax, but not the receiver.

• Black Lung Disease Benefits Payments

Payments received through the Division of Coal Mine Workers’ Compensation (DCMWC) are considered nontaxable income.

• Interest on Municipal Bonds

Interests earned against certain municipal bonds issued by states, cities, counties, and other government entities to finance their operations are generally exempt from federal income tax.

• Combat Pay

Military income received while stationed in a combat zone is usually not taxable.

• Vacation Rental Income (Limited)

A personal home rented out for less than 15 days during the tax year is not taxable.

Taxable Income

• Employee Compensation (Salaries and Wages, Tips, Bonus, Fees Paid)

Employee compensation is the most common type of taxable income and can be allocated to salaries and wages, tips, bonuses, and fees paid by an employer to an employee.

• Fringe Benefits

Fringe benefits such as use of a company car, country club membership, tickets to sporting events, etc. received as a director, partner, or through an employer are taxable.

• Business and Investment Income

Income earned from certain types of business and investment activities, such as any rental income from properties is taxable. Please note that expenses related to the rental can be deducted to offset the income gained/earned that must be declared for tax purposes.

• Partnership Entities

The IRS does not tax partnership entities but any income, deductions, and losses that stem from these entities are passed through to individual partners. The partner in question here must, therefore, declare any pass-throughs on their annual tax return.

• S Corporation

S corporations are exempt from paying any income tax on earnings. This is instead passed through to shareholders based on their ownership stake in the Corporation. Shareholders must, therefore, report earnings, losses, and deductions on their personal income tax return.

• Royalties

Royalties are taxable income that are earned on intellectual property such as copyrights, patents, trademarks, etc. and oil, gas, and mineral properties.

• Bartering

Bartering involves the act of exchanging goods and services rather than cash. The fair market value of the property or services you received from bartering must be included in your gross income.

• Digital Currencies

Activities such as sale, exchange or investment related to digital and alternative currencies are considered taxable income.

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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.