Taxable And Tax Free Sources Of Income

Most income is taxable. Also, you generally have to pay tax if you sell something for more than your basis (the amount you paid for).

Most common taxable income

  • Wages, salaries and tips: the income what you get in exchange for your work
  • Extra cash: you have to pay tax on the income from your side job
  • Alimony: if you get alimony, the payment you receive is taxable. If you paid alimony during the year, you can deduct it.
  • Unemployment benefits: unemployment compensation is fully taxable
  • Jury duty pay: jury duty pay is taxable income, however, you can deduct the amount of money you turn over to your employer in exchange for continuing to receive a salary pay
  • Pension: pension and annuity payments are taxable, however, there might be a tax-free portion of it
  • Awards: Awards you receive for your performance from your employee are taxable. However, gifts you receive for the length of service or other achievements are tax-free if the employee’s cost doesn’t exceed $1,600.
  • Barter: the FMV of the property or services you receive in exchange for another property or service is taxable
  • Disability benefits: if your employee pays the premiums for your disability insurance, the payments you receive are fully taxable. However, if you paid the premiums, the payments you receive are tax-free. You don’t have to pay tax on disability connected to government service (e.g veterans’ disability)
  • Prizes: all prizes you won during the tax year are taxable

Most common tax-free income

  • Auto rebates: this is actually a reduction in the price of the car, so it’s not a taxable income
  • Carpool receipts: if you drive a carpool, the payments you receive from your passengers are not taxable, it is considered as reimbursement for your expenses
  • Child support payments: these payments are tax-free as the payor can’t deduct child support
  • Casualty insurance proceeds: you don’t have to report your income if you are reimbursed for your loss like a car accident or house fire
  • Combat pay: combat pay is not subject to income tax
  • Damages: if you receive compensation for personal physical injury or sickness, it is tax-free. However, if you receive it for lost wages or profits, you have to pay tax
  • Gifts: you don’t have to pay tax on gifts you receive from family members or friends. If there is a tax liability on the gift, the giver owes the tax
  • Health and accident insurance benefits: if you are reimbursed for medical expenses you paid out of pocket, the money you receive is not taxable.
  • Inheritances: your inheritance is


Your inheritance is not taxable.

Any money or property you inherit is tax-free unless the item is considered to be income in respect of a decedent (IRD). Items like retirement accounts are usually considered to be IRD. If you inherit a traditional IRA or company retirement benefits, you must pay tax on the income just as the deceased would have had to do.