Know What’s Not Taxable

When you begin preparing your tax return, you learn that there are not many things that the IRS considers not taxable. Some of the obvious taxes that we all pay are taxes on wages, rent, interest, commissions, tips, and dividends. You are also taxed on capital gains, prizes, and on gifts that you receive. Forgiven or canceled debts even come at a taxable price.

If you think you can avoid paying on certain taxable items, you may be asking for trouble. When you barter your services, for instance, the noncash value of your services will be converted into the cash market value and considered income. It’s definitely a good idea to review what the IRS deems is taxable. Bankrate shares some of the financial transactions that are not typically burdened with tax liabilities.

Some instances where the taxman wants his cut include the following:

• • Alimony received.
  • Awards, prizes, contest winnings, and gambling proceeds.
  • Back pay awards.
  • Notary public fees.
  • Patent, royalties, license receipts, and any infringement compensation.
  • Profit on sales between family members.
  • Punitive damages.
  • Residence sale profit above the exclusion limits.
  • Severance pay.

In the clear, tax-wise

There are few sources of income that are not taxable. Unfortunately, many represent money you wish you didn’t need to get in the first place.

Types of income the IRS usually can’t touch

• • Black lung disease benefits.
  • Payments from a state crime victims fund.
  • Disaster relief grants.
  • Casualty insurance and other reimbursements.
  • Child support payments.
  • Compensatory damages awarded for physical injury or physical sickness.
  • Damages for emotional distress due to a physical injury or physical sickness.
  • Disability payments if you paid the premiums on the policy with already-taxed dollars.
  • Foster care payments when the care is for youngsters.
  • Interest in a certain state or local government obligations.
  • Supplemental Security Income, or SSI.
  • Veterans benefits.
  • Welfare benefits.
  • Workers’ compensation.

And while the inheritance of property is not a taxable event, you’ll owe Uncle Sam on any income the bequest produces.

Navigating murky tax waters

As with almost every tax situation, it’s not always clear-cut when it comes to taxable versus nontaxable income.

For example, the tax laws treat various scenarios regarding life insurance payments differently. If you surrender a life insurance policy for cash, you must include as taxable income any proceeds that are more than the cost of the policy. But life insurance proceeds paid to you as the beneficiary of the insured person are not taxable unless the policy was turned over to you for a price.

Another instance where income may or may not be taxable is a scholarship or fellowship grant money. If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship and used to pay tuition, fees, or buy books or other required educational equipment. Grant money used for room and board, however, is taxable.

And there are special taxable income rules for certain professions, such as the clergy or folks who work for foreign employers, as well as for volunteers who might receive nominal amounts for their services.

These examples are not all-inclusive. So if you have an unusual income situation, check out the IRS rules with your tax adviser. You may or may not have to pay taxes on the money.

A complete look at what the IRS considers taxable or nontaxable is available in Publication 525, Taxable and Nontaxable Income.