The tax code contains several areas that can confuse the taxability of money received. Some of these items may surprise you. So, what is taxable and what’s not? Here are some of the most common areas of confusion.

Taxable items

• Unemployment compensation. Unemployment compensation is typically required to be reported as taxable income. So you could face a tax surprise if you received unemployment income this year. There are historic cases where federal and state taxing authorities are authorized to exempt unemployment income from taxation, so this is an area worth watching for possible future legislation.
• Free services. Receiving free services is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return. You can deduct allowable business expenses against the services’ value if you exchange services. So, if you are trading goods or services, now is the time to track this information.
• Illegal activities. Even income from illegal activities is taxable and must be reported on your tax return. The IRS even states that stolen items should be reported at their fair market value on the date the thief stole them!
• Jury duty pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.
• Legal settlements. A general rule of thumb regarding legal settlements is to consider what the settlement replaces. If the settlement replaces a taxable item, like lost wages, it often creates taxable income. This area is complex and usually requires a detailed review.

Non-taxable items

• Life insurance proceeds. Life insurance proceeds paid to you because of the death of an insured are generally not taxable. There are, however, several exceptions to this general rule. For example, you could have taxable income if you receive benefits in installments above the value of the life insurance policy at the time of death or if you receive a cash payout of a policy.
• Prizes. Most prizes received should be reported as ordinary income using the item’s fair market value. This area has been a major surprise to contestants on game shows and celebrities who receive large gifts at events like the Academy Awards.
• Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it for divorce decrees before 2019. For all divorces finalized in 2019 and later, alimony is neither deductible by the person who paid it nor deemed additional income by the person receiving it. So be aware of these new rules if you consider changing old divorce decrees. Ensure you have proper documentation as part of a divorce decree to support your tax position.
• Child support. Child support is not taxable to the person who receives it on behalf of the dependent and is not deductible by the person who pays it.

Some of these areas can be complicated, so please call to discuss if any of these situations apply to you. Contact our RRBB advisors if you have any questions about what is or is not taxable.