All income is not created equal—at least in the eyes of the IRS. When you file your federal income tax return, some income needs to be reported, while other income does not.
How do you figure out what counts as taxable income and what doesn't? It's not always obvious. We've assembled a guide to help you determine whether or not income you earned or received needs to be reported to the IRS.
Here are types of income you must report on your federal tax return.
|Taxable Income for 2020
|Salary you earned in 2020 should be reflected on a W-2 form issued by your employer.
|Wages typically are associated with hourly work, while salary usually refers to an annual amount of pay.
|This includes tips given directly by customers, tips added to credit cards and tips shared with coworkers.
|An employer will include the total amount of severance pay on your W-2, and will withhold appropriate federal and state taxes.
|Overtime pay is taxed the same as wages are.
|A bonus is treated as supplemental income and taxed at a flat 22% rate.
|Also known as fringe benefits, these include free airfare, country club memberships and tickets to sporting events.
|You can opt to have federal taxes withheld from your unemployment checks instead of paying taxes in one lump sum. If you didn't do that in 2020, you'll need to pay taxes on your unemployment benefits when you do your taxes.
|Pensions are subject to federal tax when you begin receiving distributions, although the tax may apply to only a portion of the benefits. That's because an employer will withhold taxes on at least some of the benefits when you receive pension payments.
|In most cases, interest is taxable. This includes interest you earn from checking accounts, savings accounts and certificates of deposit (CDs). However, some interest may not be taxable, such as interest earned from municipal bonds.
|This includes dividends earned from stocks and mutual funds.
|The only exception here is businesses that are organized as partnerships; however, each business partner must still report income and losses on their personal tax returns.
|Whether you're a full-time freelance writer or a part-time Uber driver, the IRS expects you to pay taxes on income you earn from self-employment.
|Social Security benefits
|These benefits are taxed only if your income exceeds certain limits set by the federal government. If your income goes over those limits, you'll be required to pay federal tax on either 50% or 85% of your Social Security benefits.
|This includes all winnings, no matter how big or small. Examples include cash prizes or material goods won on a game show or through a raffle.
|This includes winnings from a lottery, a slot machine jackpot and all other forms of gambling.
|Court settlement or judgment
|In most cases, income received from a court settlement or judgment qualifies as taxable income. However, damages awarded for medical expenses or physical injuries aren't taxed.
|Income from bartering
|Even if cash isn't involved, you typically must pay taxes when goods or services are traded, such as if a plumber fixes a dentist's toilet in exchange for dental work.
|Qualified withdrawals from a traditional 401(k) or traditional IRA
|While money taken out of a traditional 401(k) or traditional IRA retirement account is taxable income, money pulled from a Roth 401(k) or Roth IRA is not taxable. That's because money in a Roth 401(k) or Roth IRA already has been taxed, while money in traditional 401(k) or traditional IRA has been deposited tax-free.
|In the eyes of the IRS, most types of forgiven, canceled or settled debt are taxable. Exceptions include debt eliminated during a bankruptcy and certain student loans.
|Income from short-term rentals
|This includes space, such as a condo or a room in your house, that you rent through Airbnb and similar platforms. IRS rules about this are complicated, but rental income frequently is subject to both income and self-employment taxes.
Following is income not typically taxed by the IRS, though there are exceptions in certain categories. Also, if your state imposes an income tax, its tax rules may differ from the IRS' rules. Our guide includes only federal taxes.
|Nontaxable Income for 2020
|Coronavirus stimulus checks
|These checks, received by millions of Americans, are not considered taxable income. The money does not need to be reported on your federal tax return, so it won't affect your tax refund or tax payments.
|A scholarship normally is tax-free, as long you're working toward a degree and you're putting the money toward things like tuition, fees, books and supplies. However, scholarship money earmarked for living expenses is taxable.
|Life insurance payouts
|These proceeds typically aren't taxable for life insurance beneficiaries, but any interest earned is taxable.
|Child support payments
|The recipient of child support payments does not pay taxes on the money, and the payer cannot claim a tax deduction for these payments.
|Under divorce or separation agreements reached after Dec. 31, 2018, or certain agreements changed after that date, alimony payments are not taxable. Under agreements reached before that date, however, alimony payments are taxable.
|This one is a little tricky. Normally, the recipient of a gift doesn't have to pay a gift tax. However, the person who gave the gift may be required to report it to the IRS if the giver exceeds the annual dollar amount allowed. For 2020 and 2021, the limit is $15,000 per recipient.
|Regardless of whether it comes in the form of cash, investments or property, an inheritance isn't taxed.
|Workers' compensation benefits
|These benefits aren't taxed unless you already receive retirement benefits, Social Security Disability Insurance benefits or Supplemental Security Income benefits. In those cases, a portion of the benefits might be taxed.
|Welfare income is not taxable.
|In many cases, disability benefits aren't taxable. For instance, if disability insurance premiums were paid by you or your employer with money that was already taxed, the benefits aren't taxable. Meanwhile, Social Security disability benefits aren't taxable if the recipient's so-called "provisional" income falls under a certain amount.
|Employer-provided health insurance
|You will not pay taxes on insurance benefits you receive from your employer.
|Money made from a garage sale
|Typically, money you earn from a garage sale isn't taxed. However, you could face a tax hit if you sell items at a garage sale for more than you paid for them.
|Proceeds from a home sale
|If you gain more than $250,000 from selling your main residence ($500,000 if you file a joint tax return with your spouse), you may be able to exclude those amounts from your taxable income. This determination depends on how long you've owned and used the home.
|Qualified withdrawals from a Roth IRA or Roth 401(k)
|Withdrawals from the retirement plans aren't subject to federal taxes because the money going into them already has been taxed.
|Certain proceeds from court settlements and judgments
|If a court settlement or judgment stems from a physical injury or physical illness, the money you receive isn't taxable. The same holds true for medical expenses related to a settlement or judgment, even if the injuries are considered emotional rather than physical.
|Cash rebates from purchases
|Cash rebates are not taxable income.
The Bottom Line
If you're still unsure about some income you received last year, you may want to seek advice from a tax professional.
Unless you're a tax specialist such as an accountant, it can be mind-boggling to try to figure out which income can and cannot be taxed. That's why it's critical to get help from a tax professional if you're confused about whether you're supposed to pay federal taxes on the $10,000 you withdrew from your retirement account or the $750-a-month alimony payment you receive from your ex-spouse. For answers to your in-depth tax questions, you can use the IRS' free Interactive Tax Assistant.