CARL WATTS & ASSOCIATES

March 21th, 2011

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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In an attempt to define a comprehensive system of measuring income in a complex economy, the US tax law has reached amazing complexity itself.

This newsletter is merely trying to enumerate the most common forms of taxable and nontaxable income.

As far as we, as taxpayers, are concerned, income is defined as “the sum of all the wages, salaries, profits, interest payments, rents and other forms of earnings received in a given period of time.”

Further more, the IRS specifies that gross income means all income from whatever source derived, which can be received in the form of money, property, or services, and is taxable unless it is specifically exempted by law.


Taxable income includes:

  • Wages, salaries, tips, bonuses, vacation pay, severance pay, commissions, as well as fees for personal services performed, whether self-employment income or bartering;
  • Business income, farm income;
  • Interest received and dividends, including capital gain distributions, from corporations;
  • Distributive share of partnership income;
  • Gains from sales of property, stocks and bonds, stock options, as well as disposition of other property (gain is measured as the excess of proceeds over the adjusted basis in the property);
  • Rents and royalties;
  • Alimony received and separate maintenance payments;
  • Pensions, annuities and income from life insurance or endowment contracts;
  • Social Security benefits (above the base amount);
  • State and local income tax refunds;
  • Jury pay and election worker pay;
  • Certain types of disability payments;
  • Unemployment compensation;
  • Strike and lockout benefits;
  • Bank “gifts” for opening or adding to accounts if more than “nominal” value;
  • Cancellation of debt (unless excludable by law or regulation);
  • Most court awards or damages;
  • Prizes, awards, gambling winnings.

Any other income from whatever source, even income from crimes is taxable and must be reported, as failure to do so is a crime in itself.

As you certainly know, not all income was created equal. The basic income tax structure allows individuals to earn a certain amount of non-taxable income. This is generally calculated by the standard deduction amount listed on the federal and state tax forms.

Some kinds of income are not taxable either because that income is considered as incentive or supported by the government, it was already taxed at origins or just falls below a certain taxable level.
Taxable and Nontaxable Income
Income that is generally exempt from tax includes:

  • Child support;
  • IRA and pension rollovers;
  • Federal income tax refunds;
  • Certain life insurance proceeds;
  • Gifts, bequests, and inheritances;
  • Insurance and certain other payments for physical injury and sickness;
  • Disability payments if you paid the premiums on the policy. If your employer paid the policy, then the disability payments are taxable. If you paid part of the policy, then part of the disability payments are non-taxable;
  • Interest on certain Series EE and Series I savings bonds redeemed to pay for qualified higher education expenses;
  • Interest on certain state and local obligations (municipal bonds);
  • Public assistance payments (certain Temporary Assistance for Needy Families payments);
  • Certain railroad retirement benefits (part may be exempt);


  • Social security benefits may not be taxable (it's a complicated calculation as you can see in a previous newsletter);
  • Veterans Administration disability benefits;
  • Most scholarships and fellowships;
  • Foreign earned income (needs to be reported on Form 2555, but up to $80,000 usually can be excluded);
  • Foster care payments (with certain restrictions for individuals over age 18 in foster care);
  • Gain on the sale of your personal residence is usually nontaxable. The gain might be taxable if you lived in the residence less than two years or if the residence has ever been used as a rental property or home office;
  • Workers' compensation;
  • Certain dependent care services provided by employer;
  • Certain employer-provided educational benefits;
  • Employer-provided assistance for qualifying adoption expenses;
  • Restitution payments and excludable interest received by Holocaust victims, their estates, or their heirs;
  • Cancellation of debt because of bankruptcy or insolvency;
  • Cash rebates from a dealer or manufacturer.

Of course there are still numerous sources of income taxable or nontaxable which are not listed here, in fact there may be no complete list anywhere on the internet, unless you are willing to read all through the Federal Tax Law and keep up with all new rules and regulations that come up every year.

Certainly, even better than that is to ask for professional help to make sure you’re not paying more than you should on taxes.

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