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What is nontaxable income?

        Money | Taxes

Happily, you don’t have to pay taxes on all your income. Some types are exempt.
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Here's a logic question: If it's called income tax, is there any kind of income for which you don't have to pay taxes? The answer is, happily, yes. With knowledge of some Internal Revenue Service definitions and categories, you can determine if you have any nontaxable earnings. The IRS defines "income" as money, property or services that taxpayers receive. The list of what constitutes "taxable" income is longer than the nontaxable inventory. Consequently, most taxpayers can readily identify if any of their income is nontaxable.

Some nontaxable income revolves around children. Child support payments usually fall into this category. Reimbursements for qualified adoption expenses are also nontaxable. These include costs of adopting infants, children with special needs and children from other countries [source: IRS].

Payments to people who have been injured or have fallen on hard times are given a pass. Benefits gained from workers' compensation, physical injury, sickness settlements or welfare benefits are not taxed. On the other hand, a few windfalls are nontaxable, including gifts, most inheritances and dealer and manufacturer rebates.

You must tread carefully in some areas. Income from a life insurance policy that is paid after a death is not touched. However, if you cash in a policy, you may owe taxes. Many scholarships are tax-free, but only if they are applied to tuition and required texts. If you used the money for living expenses, you'll pay taxes on it.

Certain types of income that are hyper-specific are also nontaxable. For instance, any benefits people receive due to terrorist attack or military action fit this distinction. Government grants given to prevent natural disasters are tax-free. Also, if you're a member of the clergy, housing rental allowances provided to you aren't usually counted as income.

Several perks from your employer aren't taxed. If your employer gives you an accident or health plan, its value is usually not taxable. A membership to a health club on your company's property is allowed, but its value becomes taxable income if the gym is off the premises. Some dependent-care facilities -- such as an employer-sponsored day care -- can also be excluded from income.

Don't assume that "unusual" equals nontaxable. For instance, any property or services you receive through barter are taxable, as are hostess gifts from commercial home parties. Typically, when a debt is forgiven it's good news -- but it's also considered income. Even criminals are responsible for taxes: if you receive a bribe, it must be reported as income. That kind of defeats the purpose of a secret payoff, but at least you're being honest with the IRS.


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