What Is Taxable and Nontaxable Income?

The information in this article is up to date for tax year 2025 (returns filed in 2026).

When you earn money, you’re likely familiar with the fact that you must pay taxes on most of it. However, did you know that not all income is taxable? In fact, certain types of income are nontaxable, meaning even if you report it on your tax return, you won’t owe taxes on it. Understanding which income is taxable and nontaxable can help you manage your taxes more effectively.

Taxable vs. Nontaxable Income

Income can come in many forms—not just as money but also services or property. Knowing what’s taxable and what’s not can make a significant difference when it comes to filing your tax return.

Nontaxable Income

Nontaxable income refers to certain types of income that the IRS does not tax. Below are some common examples:

1. Inheritance
   • Inheritance received from a deceased person is generally not taxed at the federal level. The estate pays taxes before distributing the inheritance, so it doesn’t count as taxable income to the beneficiary.
2. Child Support Payments
   • Money received for the support of a child’s basic needs, such as food, clothing, and shelter, is not taxable to the recipient.
3. Foster Care Payments
   • Payments made to foster parents by government agencies or child placement organizations are nontaxable.
4. Welfare Benefits (SNAP, TANF)
   • Public assistance programs like the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) are nontaxable.
5. Worker’s Compensation
   • If you receive compensation for an illness or injury that is work-related and covered under workers’ compensation laws, it is generally exempt from taxes.
6. Supplemental Security Income (SSI)
   • SSI payments, which are provided to low-income individuals who are either 65 or older, blind, or disabled, are typically nontaxable.
7. Casualty Insurance
   • Insurance claims for accidents or disasters, like a house flood or car accident, are generally tax-free unless the payout exceeds the actual losses incurred.
8. Compensatory Damages for Physical Injury or Illness
   • Damages awarded due to physical injuries or illnesses are usually not taxed. Emotional distress is often nontaxable unless caused by a specific physical injury.
9. Payments from State Crime Victims’ Fund
   • Payments provided to victims of crime by state funds are also considered nontaxable.
10. Disaster Relief Grants
    • Grants used to cover essential expenses following a disaster, such as medical or funeral expenses, are generally tax-exempt.
11. Gambling Winnings (Under Certain Conditions)
    • If your gambling winnings do not exceed your losses, those winnings are not taxable. However, if they do, the full amount is taxable.
12. Life Insurance Death Benefits
    • Death benefits paid out to the beneficiary of a life insurance policy are generally exempt from taxes.
13. Monetary Gifts
    • Gifts received from family or friends are nontaxable. However, if a gift exceeds the annual limit (for 2023, $17,000), the giver may need to pay gift taxes, but the recipient does not.
14. Black Lung Disease Benefits
    • Payments received from the Division of Coal Mine Workers’ Compensation (DCMWC) for black lung disease are nontaxable.
15. Interest on Municipal Bonds
    • Interest earned on bonds issued by state and local governments (municipal bonds) is generally not taxable at the federal level.
16. Combat Pay
    • Military pay earned while serving in a designated combat zone is not taxable.
17. Vacation Rental Income (Limited)
    • If you rent out your personal home for fewer than 14 days during the tax year, the income is nontaxable.

Taxable Income

On the other hand, taxable income is any income subject to taxation by the IRS. Common taxable income sources include:

1. Employee Compensation (Salaries, Wages, Bonuses, Tips)
   • Most employee compensation, such as salaries, wages, tips, and bonuses, is taxable. This is the most common type of taxable income.
2. Fringe Benefits
   • Fringe benefits like company cars, country club memberships, and event tickets are considered taxable income, unless specifically excluded by tax law.
3. Business and Investment Income
   • Income earned from business activities, rental properties, and investments is taxable. For example, rental income must be reported, although you may be able to deduct certain expenses related to the property.
4. Partnership Income
   • While partnerships themselves are not taxed, any income, deductions, or losses from a partnership pass through to the individual partners, who must report it on their tax returns.
5. S Corporation Income
   • S corporations are not taxed directly. Instead, income, losses, and deductions pass through to shareholders, who must report them on their personal returns.
6. Royalties
   • Income from royalties earned on intellectual property, such as patents or copyrights, or from oil and gas extraction, is taxable.
7. Bartering
   • When you exchange goods or services instead of money, the fair market value of what you receive is considered taxable income and must be reported.
8. Digital Currency Income
   • Income from digital currencies, including sales, exchanges, and investments in cryptocurrencies, is taxable.

Now that you understand the difference between taxable and nontaxable income, it’s time to get your taxes filed. Whether you’re filing for the first time or you’re a seasoned pro, ezTaxReturn makes it easy to file your taxes with confidence.

Frequently Asked Questions

What is considered taxable income?

Taxable income includes wages, salaries, tips, freelance income, investment earnings, unemployment benefits, and most forms of retirement income. If money increases your earnings for the year, it’s usually taxable.

What counts as nontaxable income?

Nontaxable income includes certain gifts, inheritances, life insurance payouts, child support, some disability benefits, and municipal bond interest. These sources don’t generally increase your tax bill.

Are Social Security benefits taxable?

It depends. Part of your Social Security benefits may be taxable based on your total income and filing status. Higher income levels increase the amount that may be taxed.

Is unemployment income taxable?

Yes. Unemployment benefits are considered taxable income by the IRS and must be reported on your tax return.

Are scholarships and grants taxable?

Scholarships and grants used for qualified education expenses like tuition and required course materials are nontaxable. Money used for room, board, or other non-qualified expenses is taxable.

Is disability income taxable?

Some disability benefits are taxable, depending on the type of policy and who paid the premiums. Employer-paid disability benefits are typically taxable, while individually purchased policies often aren’t.

Are gifts or inheritances taxable?

No. Receiving a gift or inheritance is generally nontaxable. However, large gifts may require the giver to file a gift tax return.

Are life insurance payouts taxable?

Typically, life insurance payouts received after someone’s death are nontaxable. Interest earned on those payouts, however, may be taxable.

Is child support or alimony taxable?

Child support is not taxable and cannot be deducted by the payer. Alimony is only taxable for divorces finalized before 2019; for newer agreements, it’s neither taxable nor deductible.

Is rental income taxable?

Yes. Rental income is taxable and must be reported. You can often deduct related expenses such as repairs, insurance, and property taxes.

Are workers’ compensation benefits taxable?

Generally, no. Workers’ comp benefits are nontaxable, as long as they’re paid for job-related injury or illness.

How do I know if other income I receive is taxable or nontaxable?

The IRS provides a detailed list of taxable and nontaxable income in Publication 525. When in doubt, check there first.

The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.