You may receive a payment from sources outside of your job and wonder whether you need to report that income on your tax return. Not all earnings are treated the same. Here’s a look at what you need to report (or not) and what types of earnings are subject to federal and state tax.
What is taxable income?
Taxable income is any income you must report on your return and will have to pay tax on. Your taxable income could include more than the wages or salary you earn from your job. Other examples of taxable income include unemployment benefits, fringe benefits, self-employment income, tips, interest and dividends, and capital gains (except for the sale of your primary residence).
What income is non-taxable?
Certain types of income are not taxed. These include alimony (in some cases), child support payments, gifts, scholarships, foster care payments, and Social Security (depending on your income). Even though some of this income is not taxed, you may need to enter it on your return. The IRS still uses certain income to calculate items like credits and deductions, track large transactions, or include on your state return.
Taxable Income
Non-Taxable Income
For more info and a complete list of taxable and non-taxable income types, see IRS Publication 525.
What types of income are sometimes taxable?
Some types of income can be taxable or non-taxable depending on the specific circumstances. For example, Social Security benefits may be tax-free for some individuals, while others may need to pay taxes on a portion of their benefits if their overall income exceeds certain thresholds. Similarly, money received from a legal settlement is not always treated the same way for tax purposes. Compensation for physical injuries or illness is often not taxable, but amounts awarded for lost wages, punitive damages, or interest may need to be reported as income. Because the tax treatment of these payments can vary based on the source of the income and an individual’s financial situation, it’s important to review the details carefully when determining whether the funds must be included on a tax return.
What types of employee compensation are taxable?
As an employee, your salary and fringe benefits are subject to federal income tax and Social Security and Medicare (FICA) taxes.
Your employer will withhold federal and state income taxes from pay and taxable benefits to cover your tax liability all year. Your employer should also withhold FICA taxes (Social Security and Medicare) from some of these benefits.
If you are self-employed, you don’t have an employer withholding tax from your pay. Instead, you should pay self-employment tax in four separate installments, called quarterly estimated tax payments.
Is crypto taxable income?
If your employer or client pays you in cryptocurrency, it’s considered taxable income and is subject to income tax withholding. If you mine crypto, that is typically treated as self-employed income.
If you mine, receive, trade, sell, or exchange crypto during the year, you must report that activity on your tax return. But when you hold onto your virtual currency, it is treated as property, and you’ll only need to pay taxes when you have a taxable event that results in a gain.
Are pensions taxable income?
Pension and annuity payments are generally considered taxable income.
According to the IRS, “If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account.”
Are scholarships taxable income?
If you (or your student) is enrolled full-time and the scholarship funds are used to cover qualified expenses, like tuition, fees, books, supplies, or other equipment required to pursue your degree, then it is not considered taxable income by the IRS.
H2: Are gift cards from employers taxable income?
Generally, a gift card from your employer should be reported and is subject to tax. That’s because the IRS treats cash and cash equivalents, like gift cards, the same way for tax purposes when they are distributed to employees. In other words, no matter how small the amount, cash or cash equivalent payments are taxable. The gift card should be included on your Form W-2 if given by your employer and you would not need to report it in another way.
H2: Is alimony taxable income?
Alimony, also known as spousal support or maintenance, is generally taxable to the person receiving it, and tax-deductible for the person paying if the agreement was signed on or before December 31, 2018.
So, if your divorce was finalized before 2019 and you receive alimony, you must include it as taxable income on your federal income tax return. It will be subject to federal income tax at your ordinary income tax rate. Some states also require you to pay state income tax on alimony.
If your divorce was finalized in 2019 or later and you are the one receiving alimony, you don’t need to report it as taxable income.
H2: Is child support taxable income?
No. If you receive child support from your ex, the payments are not considered income for tax purposes. Your child should not claim child support as income, either. Child support is entirely tax neutral, no matter if you have sole or shared custody.
H2: Is inheritance taxable income?
In general, inheritance itself is not considered taxable income. This means you generally do not have to pay federal income taxes on the money or property you inherit from a deceased person.
However, there are a few important exceptions. For example, if you inherit an individual retirement account (IRA) or other tax-deferred retirement account, you may be required to pay income taxes on the distributions you receive from the account. And if you inherit property that generates income, such as rental property or stocks that pay dividends, you may be required to pay taxes on that income.
In addition, some states may have inheritance or estate taxes that apply to certain inheritances, although these taxes typically only apply to larger estates.
H2: Is Social Security taxable income?
Social Security benefits may be taxable, depending on your total income and filing status.
If your combined income, which is your adjusted gross income plus non-taxable interest plus half of your Social Security benefits, exceeds a certain threshold, a portion of your Social Security benefits may become taxable.
H2: Is unemployment taxable income?
Yes, unemployment compensation is subject to federal income tax, and you’ll need to report the amount you received on your tax return. You should receive a Form 1099-G showing the total unemployment compensation that was paid to you.
H2: Is disability income/SSDI taxable?
It depends on your circumstances. Disability benefits that are paid to you by your employer are subject to tax and should be reported as wages on your Form 1040. But if you receive military disability from the government or the VA, those benefits are not taxed.
SSDI benefits are also not subject to federal tax, but your state may tax them.
Wondering what to expect when you file your taxes this year? Use our tax refund calculator to get your estimated tax refund or an idea of what you’ll owe.
