Taxable vs. Non-Taxable Income

Generally speaking, the IRS considers almost every type of income under the sun to be taxable income. No surprises there, right? However, there are a few but significant exceptions, which are non-taxable income streams. What are they and how do they work? Let’s dive in!

What Types of Income Are Subject to Tax?

Are you trying to determine whether or not all of your income is taxable? While the IRS considers most types of income to be fully taxable, there are certain instances where your income may not be subject to tax.

Taxable Income

Essentially, all income is considered taxable unless it’s specifically excluded by the law. Income can be in the form of money, property, or services that you receive.

In general, you are taxed on the income that’s available to you, whether or not it’s actually in your possession. All taxable income must be reported on your Federal tax return and is subject to taxation.

Types of taxable income include the following:

• Wages

• Salaries

• Commissions (including advance commissions)

• Fees

• Tips

• Stock options

• Interest received

• Dividends

• Unemployment compensation

• Back pay awards (from a settlement or judgment)

• Bonuses and awards (including vacation trips)

• Differential wage payments

• Notes received for services

• Severance pay

• Social Security and Medicare taxes paid by your employer

• Stock appreciation rights (in the year they’re exercised)

• Cancelled/forgiven debt

• Non-cash income from bartering

• Financial counseling fees paid for you by your employer

• Royalties from copyrights, patents, and oil, gas, and mineral properties

• Rents from personal property

• Capital gains and losses

• Gambling income and losses

RELATED: Refundable vs. Non-Refundable Tax Credits

Non-Taxable Income

In some instances, the income you receive is not subject to tax. However, it’s important to note that while certain types of income are non-taxable, you may still need to report those items on your tax return.

Types of non-taxable income include the following:

• Child support payments

• Reimbursements for qualified adoption expenses

• Gifts, bequests, and inheritances

• Cash rebates from a dealer or manufacturer for an item you buy

• Welfare benefits

• Damage awards for physical injury or sickness

• Meals and lodging for the convenience of your employer

RELATED: Top COVID-Related Tax Breaks

Income That May or May Not Be Taxable

Some types of income are non-taxable, but only under certain conditions (such as an exclusion provided by the IRS). Depending on the situation, your income may be fully taxed, partially taxed, or not taxed at all.

Types of income that may or may not be taxable include the following:

• Life insurance

• Scholarship or fellowship grant

• Non-cash income

• Employee achievement award

• Government cost-of-living allowances

• Nonqualified deferred compensation plans

• Nonqualified deferred compensation plans of nonqualified entities

• Sick pay

• Refunds, credits, or offsets of state/local income taxes

• Fringe benefits

• Workers’ compensation benefits

• Social Security benefits

• Virtual currencies

Note that the above examples are not all-inclusive. For more information, please see IRS Publication 525 (Taxable and Nontaxable Income).

RELATED: Marginal Income Tax Brackets

How Are Digital Currencies Treated By the IRS?

If you get paid in cryptocurrency—whether by an employer or a client—it counts as taxable income. Essentially, it’s just like getting paid in cash, so there are no changes to the tax situation there and it’s subject to income tax withholding.

In a similar vein, if you’re mining crypto, the IRS usually sees that as self-employment income, meaning you’ll need to report it and potentially pay self-employment taxes.

The biggest change comes when you’re mining crypto. The heyday of crypto mining might be behind us, but it’s not gone. Anytime you mine, receive, trade, sell, or exchange crypto, you have to include it on your tax return.

However, if you’re just holding onto your crypto, it’s treated like property. You won’t owe taxes until you actually sell or trade it, and only if you make a profit (a taxable event).

Most Common Types of Taxable Income

Like you saw in our list from the previous section, there are plenty of examples of non-taxable income, things are not always as simple as they seem. The specifics of non-taxable income almost always vary depending on which type you’re talking about, and sometimes it even becomes taxable income under specific circumstances.

Let’s look at a few examples to better explain what we’re talking about.

Financial Gifts

When it comes to taxes on gifts, it’s usually the giver who is responsible, not the person receiving the gift. If someone gives you money and it’s not tied to any work or services you provided, it’s generally not considered taxable income. However, if your employer gives you a financial gift, that’s a different story—it’s typically taxable. Employers can give small non-cash gifts (worth $25 or less) without tax implications, but anything over that amount is taxable.

On the other hand, if you and your coworkers exchange financial gifts, there’s no tax liability—employees can give each other money in any amount without triggering taxes. But keep in mind, business bonuses and profit-sharing payments are not considered gifts at all. These count as compensation for services, so they are always taxable.

Disability Benefits

To qualify for disability benefits, a person must have suffered a temporary or permanent disability due to an illness or injury. Generally, disability payments and workers’ compensation are not taxed. But if your disability benefits come from an insurance policy paid for by your employer, those benefits are subject to taxes.

Most disability benefits, including workers’ compensation, private disability insurance, and payments made with after-tax dollars, are exempt from federal income tax. Additionally, compensation received for injury, illness, or loss of function is not taxed, as long as it’s not a punitive settlement (such as a lawsuit penalty).

Life Insurance Proceeds

If you receive life insurance proceeds after someone passes away, that money is not taxable. Since the deceased was the insured person, their life insurance payout doesn’t count as part of your gross income, so you don’t have to report it on your tax return. However, if the policy accrues interest, you do need to report the interest as taxable income.

Inheritances

If you inherit money, investments, or property, you generally don’t have to pay taxes on it—at least in North Carolina, which has no inheritance tax. But if the deceased lived in another state, you’ll need to check that state’s inheritance tax laws.

Estate taxes are a separate issue altogether. These taxes apply to the total value of someone’s assets when they pass away. For 2025, estates valued at $13,990,000 or less are exempt from federal estate tax. If the estate is worth more than that, taxes may apply, and they must be reported.

Alimony and Child Support Payments

If you receive alimony or child support after a divorce, the good news is—you don’t have to include it as taxable income. Since 2019, alimony payments are no longer tax-deductible for the person making the payments, meaning they can’t write it off on their tax return. Child support has never been taxable, so parents receiving those payments don’t need to worry about including them in their gross income either.

Taxable vs. Non-Taxable Income: FAQ

1. What exactly is non-taxable income?

Non-taxable income is money that the IRS doesn’t require you to include when filing your tax return. This could be government benefits, certain insurance payouts, or even gifts.

2. Are Social Security benefits considered non-taxable?

It depends! If Social Security is your only source of income, it’s likely not taxable. But if you have additional income, a portion of your benefits might be subject to tax.

3. Can I avoid taxes by receiving money as a gift?

Yes and no. While receiving a gift isn’t taxable for you, the person giving it might have to pay a gift tax if the amount exceeds the annual exclusion ($18,000 in 2024).

4. Is unemployment income non-taxable?

No, unemployment benefits are taxable. Unlike some government benefits, you’ll need to report unemployment income when filing your taxes.

5. Do I need to report non-taxable income on my tax return?

Generally, you don’t need to report it—but keep records just in case. Some forms of non-taxable income might still need to be listed on certain tax documents.

6. Are inheritances considered taxable income?

In most cases, no! Inheritance itself isn’t taxable, but if it earns interest or generates income (like from rental properties), those earnings could be taxable.