Taxable vs. Non-Taxable Income

US Tax Center Staff Published: December 20, 2021February 26, 2025

Key Takeaways

Not All Income Is Taxed!: Some money you receive, like gifts or life insurance payouts, isn’t considered taxable by the irs.
Certain Government Benefits Are Tax-Free: Payments like supplemental security income (ssi), workers' compensation, and VA disability benefits don’t need to be reported as taxable income.
Some Education-Related Funds Are CExcluded: Scholarships and grants used for tuition, books, and required fees are generally non-taxable—but if you spend them on non-education expenses, they might be taxable.
Employer Perks Can Sometimes Be Tax-Free: Benefits like health insurance, tuition assistance, and certain reimbursements from your job aren’t considered part of your taxable income.
There Are Limits To What’s Non-Taxable: While some types of income don’t get taxed, things like large monetary gifts or forgiven debt might have tax implications depending on the amount and situation.

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 income streams that are non-taxable. 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

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.