Friday, February 4, 2011

What Income Is Not Taxed or Only Partially Taxed

Most income is considered taxable but there are instances when some categories of income are partially taxed or not taxed at all.

Examples of items not included as taxable income include:

Adoption Expense Reimbursements for qualifying expenses
Child support payments
Gifts, bequests and inheritances
Workers' compensation benefits
Meals and Lodging for the convenience of your employer
Compensatory Damages awarded for physical injury or physical sickness
Welfare Benefits
Cash Rebates from a dealer or manufacturer

Some types of income may be taxable in certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

Life Insurance:
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.

Scholarship or Fellowship Grant:
If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

Non-cash Income:
Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items,including income such as wages, salaries, tips and unemployment compensation,are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at

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