When it comes to taxes, one thing is certain: income matters. From the money you earn through hard work to the unexpected sources that come your way, understanding what income is taxable is essential. Whether it’s your wages, salaries, royalties, commissions, rent, fees, or tips, these familiar sources of income all fall under the watchful eye of the taxman. 

But there’s more to this story. In addition to the expected, taxpayers should be aware of some surprising sources of taxable income. 

In this blog post, we’ll delve into the world of taxable income and shed light on those often overlooked sources that can impact your financial obligations. 

Join us as we discuss the taxation of income from illegal activities, the complexities of bartering, the nuances of alimony and found money and the tax treatment of gambling and lottery winnings. Additionally, we’ll explore the circumstances under which income, such as child support and employer-provided group-term life insurance, remains non-taxable.

 By understanding what is and isn’t subject to taxation, you’ll be better equipped to navigate the ever-evolving tax landscape confidently. Let’s dive in and uncover the essentials that will empower you to make informed decisions when it comes to your tax obligations.

What is Taxable Income?

Taxable income, as defined by the Internal Revenue Service (IRS), encompasses all income received by individuals or entities that is subject to taxation. This includes various sources of earnings such as wages, salaries, commissions, bonuses, rental income, self-employment income, and investment gains. Taxable income may include alimony, royalties, gambling winnings, and fringe benefits. 

It is important to note that the IRS has specific guidelines and thresholds for determining taxable income, and taxpayers are required to report and pay taxes on all income falling within the taxable category. By understanding what constitutes taxable income according to the IRS, individuals can ensure compliance with tax laws and fulfill their financial obligations responsibly.

Income from Illegal Activities

It’s a harsh reality that extends beyond the realm of casual gambling: even income derived from illegal sources is considered taxable. While criminals may wish to keep their illicit earnings hidden from the prying eyes of the IRS, evading taxes on illegal income is considered a punishable offense under the law. 

The IRS leaves no room for ambiguity, stating that income from illegal activities, including proceeds from the sale of illegal drugs, must be reported on Schedule 1 (Form 1040), line 8z, or Schedule C (Form 1040) if derived from self-employment. Regardless of the self-incriminating nature, criminals are legally obligated to pay taxes on income received from illegal activities, a fact reinforced by landmark court cases such as United States v. Sullivan and the infamous Al Capone tax evasion case.


Even though there is no exchange of currency in bartering, it is taxable. When bartering for commercial purposes, such as exchanging plumbing services for gardening services, taxpayers need to include the fair market value of the service/property bartered and include it in their income. For non-commercial purposes, such as babysitting services exchanged by neighbors, it need not be reported to the IRS or paid taxes on.


Alimony is taxable to the recipient. The receiver of the alimony needs to include it in their income on Schedule 1 (Form 1040), line 2a. Though alimony is taxed, child support is not taxable since it is not considered income to you.

Found Money/Property

If you find money or property lost or abandoned, often referred to as a ‘treasure trove,’ it is taxable. You need to find its fair market value in the first year of your undisputed possession of it and pay taxes on it.

Gambling & Lottery Winnings

Gambling winnings are taxed and must be included in income on Schedule 1 (Form 1040), line 8b. Also, taxpayers can deduct gambling losses up to the amount of their winnings if they itemize for tax years 2018 through 2025. Gambling businesses are also required to pay taxes using Schedule C (Form 1040). Lottery winnings are similarly treated and are taxed just like gambling winnings.


If you host a party where sales are made or receive gifts/gratuities for holding the party, that money/gift is considered income for tax purposes and needs to be reported at its fair market value.

What is Non-taxable Income?

Though many items are subject to taxation, there are certain things that are not taxable. According to the IRS, non-taxable income refers to specific types of earnings or items exempt from federal income tax. The tax code establishes these exclusions and provides relief to taxpayers by allowing certain income sources or items to be excluded from their taxable income. 

While the list of non-taxable income is extensive and varies depending on individual circumstances, some common examples include certain gifts and inheritances, qualified life insurance proceeds, child support payments, certain employee benefits such as health insurance, and certain educational assistance. It’s important for taxpayers to consult IRS guidelines or seek professional advice to determine the specific non-taxable income applicable to their situation.

Inherited Property/Gifts

In most cases, if you receive property as a gift, bequest, or inheritance, it is not considered income and, therefore, not taxed. However, if you begin to use the property for income generation, such as rent, interest, or dividends, that income is taxable. Even if a property is given to a trust, and you receive income from that property in the form of gifts, money, etc., that income is taxable as well.

Child Support

Child support payments you receive are not taxed. Child support neither attracts taxes nor can be deducted from income. They are completely tax-neutral.

Employer-Provided Group-Term Life Insurance

In most cases, if your employer or former employer provides you with group-term life insurance coverage of up to $50,000, it is not to be included in your income. If the cost of the insurance is over $50,000, then it needs to be included in your income as part of your wages.

Understanding Tax Obligations

The good news? Many exemptions and exceptions are allowed under the tax code based on various factors, which taxpayers may consider when filing their tax returns. Some types of income that are not taxable still need to be reported to the IRS. Tax obligations may vary depending upon the particulars of the income and its source. Taxpayers may refer to IRS Publication 525, which contains a comprehensive list of what’s taxable and what’s not, to understand their tax obligations accurately.

By delving into the nuances of taxable and non-taxable income, you can make informed decisions and fulfill your tax obligations accurately. 

Remember, tax laws are subject to change, so it’s crucial to consult with a qualified tax professional or refer to the latest IRS guidelines to ensure compliance with the prevailing regulations.

By delving into the nuances of taxable and non-taxable income, you can make informed decisions and fulfill your tax obligations accurately and confidently.

In case you haven’t filed your tax return for 2022 and are now facing back tax debt, or you need help negotiating a payment plan with the IRS, the team at Justice Tax is here to help. 

Contact us today to speak to one of our experienced tax professionals.


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