Posted by Elliot Kravitz, ATP

Taxable vs. Non-taxable Income

Taxable vs. Non-taxable Income

Are you wondering if there is a hard rule on taxable income and non-taxable income? The answer is simple: all income is taxable unless it is expressly excluded by law. But, as you've probably guessed, there is more to it.

Taxable income includes all money received, such as wages, tips, and unemployment insurance. It can also include non-monetary income from goods or services. For example, both parties that engage in a barter exchange must include the fair market value of the services or goods received as income on their tax return.


What is taxable income?

This is the amount of income used to calculate the amount of tax that an individual or business owes the government in a given fiscal year. It is generally described as the adjusted gross income: the total income, called "gross income", less any deductions or exemptions allowed in that fiscal year. Taxable income includes salaries, wages, bonuses, and bonuses, as well as investments income obtained.


Types of taxable income

All taxpayers know that failure to file a tax return can have serious consequences. So to make sure your taxes are paid, here is a list of income types:

  • Compensation and employee benefits: These are the most common types of taxable income and include wages and salaries, and additional benefits. 

  • Investments and business income: Self-employed workers are also subject to tax obligations, particularly through the income from their activities. For example, net rental income and business income are considered taxable income. 

  • Miscellaneous taxable income: This includes incomes that do not match the other types. This includes things like death benefits and life insurance. Alimony, exchange items, and leisure income are also miscellaneous taxable income.


How to calculate taxable income

Each tax season, workers calculate their income to determine how much tax they owe. While some people can do it on their own, many seek help from professionals. Here are some simple steps to determine your adjusted gross income: the amount your tax debt is calculated on.


Determine the total income: Individuals must receive all compensation received.

  • Calculate your income: Unearned income refers to income earned without the need for paid work, such as dividends, alimony, unemployment insurance, and real estate income.

  • Choose filing status: There are four states for filing purposes: single, married, joint filing, married and filing separately, and head of households.

  • Reduce your income: Form 1040 contains a list of common deductions from gross income.

  • Calculate the adjusted gross income: After adding all the deductions from the previous step, this figure will be subtracted from the total or gross income to get the "adjusted gross income." This is the amount of income on which tax is collected.


Non-taxable income

These are some types of income that are generally not taxable:

  • Child support payments

  • Damage premiums for physical injuries or illnesses

  • Donations and inheritance

  • Reimbursements of eligible adoption expenses

  • Retail or manufacturer cash rebates for an item purchased

  • Welfare benefits

Also, certain types of income are not taxable, under certain conditions, in particular:

  • If you received a national or local tax refund, the amount might be taxable. You must have received a 2020 1099-G form from the paying agency. If you did not receive it in the mail, the agency might have provided the electronic Form. Contact them to find out how to get the Form. Be sure to report any taxable refunds you receive, even if you did not receive Form 1099-G.

  • Income from an eligible scholarship is normally not taxable; that is, amounts used for certain costs, such as monthly fees and required books, are not taxable. However, the amount used for accommodation and boards is taxable.

  • The life insurance proceeds paid to you are generally not taxable. But if you redeem a life insurance policy for cash, any amount that exceeds the policy's cost is taxable.


Income from bartering is taxable.

Bartering is the exchange of one product or service with another. Sometimes small businesses market the products or services they need. For example, a plumber may barter his plumbing services with a dentist for dental services. There is generally no exchange of money.

In the case of an exchange, the exchange's goods or services' value is taxable income. Here are four facts about the exchange you should know:

  • Barter Exchange: A barter exchange is an organized market in which members exchange products or services. Some exchanges operate in an office and others on the Internet. All barter exchanges must submit Form 1099-B, proceeds from broker and barter exchange transactions. The exchange must provide a copy of the Form to members who barter and send a copy to the IRS.

  • Bartering Income: Trade dollars and barter are the same as actual dollars for tax purposes and must be reported on your tax return. Both parties are required to report the fair market value (FMV) of the product or service obtained as income.

  • Reporting standards: The way barter is reported on a tax return varies. If you are in a business or trade, you usually refer to Form 1040, Schedule C, Business Profit or Loss.

  • Tax implications: The barter is taxable in the year in which it takes place. Tax rules may vary depending on the type of trade in progress. Traders may be subject to income tax, self-employment tax, labor tax, or excise tax on their bartering income.


FOR MORE INFORMATION OR TO SEE HOW ELLIOT KRAVITZ, ATP. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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Elliot Kravitz, ATP
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