What is included in your taxable income? The answer to that question is not always a simple one, but the IRS want to help.
Tax Tip 2013-12, posted on Feb.13 to irs.gov, explains that while taxable income can include money, property or services received, many sources of income are tax-free.
Some non-taxable income sources include:
- Child support payments – While child support is not taxed, alimony payments received are taxable.
- Gifts, bequests and inheritances – Gift tax may need to be paid however by the individual (or donor) making the gift.
- Welfare benefits
- Damage awards for physical injury or sickness – Amounts awarded for lost wages are generally taxable since they represent money that would have been taxed to begin with. Punitive damages are also generally taxable.
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
IRS Publication 525, Taxable and Non-taxable Income, lists a number of income sources and provides guidance as to their taxability. Some excerpts from the publication discuss earnings that most would be surprised to learn are indeed taxable.
For example, babysitting is considered taxable income. “If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you,” states the publication.
Here’s an interesting part regarding holiday gifts:
“If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.”
Other income the publication lists contains a few surprising sources:
Bribes – If you receive a bribe, include it in your income.
Car pools – Do not include amounts you receive from the passengers for driving a car in a car pool to and from work.
Found Property – This is the “Finders Keepers” rule. If you find and keep property that does not belong to you that has been lost or abandoned, it is taxable to you at its fair market value in the first year it is your undisputed possession.
Illegal activities – Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule CEZ.
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