By John EganWhat Is Taxable Income?
The IRS imposes an assortment of rules that dictate whether you need to report income or not. Deciphering those rules can be frustrating, particularly if you're rushing to meet the April 15 deadline for filing your federal tax return.
In this guide, we unravel the IRS rules and show which types of income you need to report on your tax return and which types of income you do not need to report. It's not always clear what qualifies as taxable income, so consider consulting a tax professional if you need help navigating the rules.
What Is Taxable Income?
Most income is taxable unless a law declares it's exempt. Taxable income can come in the form of money, property, goods or services. Even if you don't receive a form that reports income that you received, you should include it on your tax return.
Keep in mind that income becomes taxable when you receive it, not when you use it. Income can be taxable even when somebody else receives it on your behalf, such as a third party making a loan payment for you in exchange for a service.
Types of Taxable Income
The following table lists types of income you must report on your federal tax return for the 2025 tax year (January 1 to December 31, 2025). In most cases, Americans will submit returns for the 2025 tax year during the 2026 filing period, which ends April 15, 2026, unless you seek a filing extension.
Taxable Income for 2025
| Salary | The annual salary you earned in 2025 should appear on a W-2 form issued by your employer. |
|---|---|
| Wages | Wages usually are paid for hourly work, while salary typically refers to a yearly amount of pay. |
| Tips | This includes cash tips from customers, tips added to tabs paid by credit card and tips shared with coworkers. A federal law passed in 2025 lets certain workers deduct up to $25,000 in qualified tips from their federal taxable income; the deduction is in effect for the 2025 through 2028 tax years. |
| Employer-paid perks | Most employer-paid fringe benefits, also known as perks, are taxable. Taxable fringe benefits often include relocation expenses, "streetwear" clothing given to an employee and memberships to off-site gyms. |
| Employer-paid bonuses | Employer bonuses are taxed, but the employer can choose whether to withhold a percentage of the bonus separately or include it as part of your regular paycheck, where standard withholding rules apply. |
| Severance pay | Because the IRS views severance pay as income, it's subject to federal taxes. |
| Overtime pay | Under a federal law passed in 2025, certain workers can deduct up to $12,500 in qualified overtime pay if they're single filers. The cap rises to $25,000 for joint filers. Above those upper limits, overtime pay is taxed at rates ranging from 10% to 37%. The overtime exemption expires at the end of 2028. |
| Self-employment income | If you're self-employed as a sole proprietorship, independent contractor or freelancer and earn at least $400 in one year, you typically must pay the 15.3% federal self-employment tax as well as income tax. You can claim a 50% deduction for the self-employment tax. |
| Social Security benefits | None of your Social Security benefits are taxable if you're an individual filer with income up to $25,000 or a joint filer with income up to $32,000. For income above those amounts, up to 50% or 85% of your Social Security benefits are taxable, depending on your total income. |
| Pension benefits | In most cases, pension benefits are subject to federal income tax withholding at a set rate of 10%. |
| Earned interest | Generally, many types of earned interest are taxed at the same federal rate as earned income is taxed. This includes interest from savings accounts, checking accounts, certificates of deposit (CDs) and most bonds. |
| Dividends | Dividends from stocks, mutual funds and exchange-traded funds (ETFs) are taxed at a federal rate that depends on your tax bracket. Qualified dividends are taxed at a lower rate than ordinary (nonqualified) dividends. |
| Capital gains | Long-term gains apply when you sell assets owned for at least one year, while short-term gains apply to assets owned for less than one year. |
| Employee stock options | Stock options are usually taxed twice: once when they're purchased and again when they're sold. |
| Qualified withdrawals from a traditional 401(k) or traditional IRA | In general, you pay the ordinary income tax rate on withdrawals made when you're 59½ or older from a traditional 401(k) or traditional IRA. |
| Annuity payments | When you receive payments from annuity, you likely will pay the ordinary income tax rate on at least some of the money. |
| Cryptocurrency purchases, sales or exchanges | The IRS treats cryptocurrency as property, meaning that if you buy, sell or exchange it (if it's in a non-retirement account), you may face capital gains taxes. |
| Selling goods or services online | Profits from selling goods or services online are considered federally taxable income. |
| Income from short-term rentals | If you rent out a house, apartment, condo or spare room for more than 14 days in one year, you may be required to pay federal taxes on the income. |
| Alimony payments | Alimony payments are normally considered taxable income if payments are made under a divorce or separation agreement executed before 2019. |
| Royalties | Royalties from the use of your copyrights, trademarks or patents, or from extraction of oil, gas or minerals are subject to federal taxation as ordinary income. |
| Prizes | Prizes such as lottery jackpots, vacations and gift cards are taxed at the federal level as ordinary income, the same as salary and wages are. |
| Winnings from gambling | Winnings from gambling, including cash and noncash winnings, are subject to federal taxes as "other income." |
| Certain proceeds from court settlements and awards | The IRS views court awards for lost wages, lost profits and breach of contract, along with most punitive damages, as taxable income. Settlements for emotional distress and other non-physical claims are also taxable. |
| Bartering goods or services | The fair market value of goods or services received from bartering is taxable as gross income. |
| Canceled debts | In general, if a debt is canceled, is forgiven or is discharged for less than the amount owed, the amount of the canceled debt is taxable. |
Types of Nontaxable Income
The table below shows several types of income that aren't subject to federal taxes.
Nontaxable Income for 2025
| Interest from municipal bonds | Interest from most government-issued bonds is exempt from taxes. |
|---|---|
| Life insurance payouts | When a beneficiary receives a life insurance payout after the policyholder dies, the payout is tax-free, particularly if it's paid as a lump sum. However, interest earned from a life insurance payout may be subject to federal income tax. |
| Inheritances | Inheritances aren't considered federally taxable income. |
| Child support payments | Child support payments don't count as taxable income. |
| Alimony payments | Alimony payments aren't taxable if a divorce or separation agreement was finalized after December 31, 2018. They also aren't taxable if a divorce or separation agreement was reached on or before December 31, 2018, but subsequently modified. |
| Welfare, disability, workers' compensation, unemployment and veterans benefits | These benefits aren't taxable because they're not considered earned income. |
| Tax refunds | IRS tax refunds are not taxable, but any interest received in conjunction with a refund is taxable. |
| Gifts | A recipient isn't required to pay taxes on a gift, but the giver may be responsible for paying a gift tax if the gift exceeds the annual allowed dollar amount. |
| Scholarships and grants | You won't be taxed on scholarships or grants if you're a degree-seeking student at an eligible school and the money goes toward tuition, fees, books, supplies or equipment. |
| Proceeds from selling a home | If you've lived in a home for at least two of the past five years, you might owe little to no taxes when you sell the home. You can exclude up to $250,000 of profit from taxable income if you're single or file separately, or $500,000 if you're married and filing jointly. For profits exceeding those limits, the capital gains tax rate (up to 20%) applies. |
| Employer-provided health insurance | Employer-paid health insurance is exempt from federal income and payroll taxes. |
| Qualified withdrawals from a Roth IRA or Roth 401(k) | Withdrawals of contributions and earnings from a Roth IRA or Roth 401(k) aren't taxed if a withdrawal is made due to a disability or death, or because the accountholder is at least 59½ years old. |
| Long-term care insurance payments | Payments received from long-term care insurance policies usually aren't taxed. |
| Certain proceeds from legal settlements or awards | Legal settlements and awards for physical injuries and illnesses are not taxable. |
| Money made from a garage sale | Money you earn from a garage sale generally isn't taxed. However, you could face a tax burden if you sell items at a garage sale for more than you paid for them. |
| Cash rebates from purchases | Cash rebates are not taxable. This includes rewards earned from rewards credit cards. |
How to Calculate Taxable Income
If you file tax returns on your own, take these steps to calculate your taxable income.
- Determine your filing status. This includes single, married filing jointly, married filing separately and head of household.
- Add up all of your sources of income. By adding up the various types of income, such as salary, employer-paid perks and earned interest, you'll come up with your gross income.
- Calculate deductions. The next step is to figure out the tax deductions that you're eligible to take. Then, subtract either your standard or itemized deductions from the total gross income. After doing that math, you'll arrive at the amount of your taxable income. Online tax calculators can help with this task.
Tip: If an accountant or another tax professional takes care of your tax returns, they should be able to easily calculate your taxable income.
Learn more: Standard vs. Itemized Deductions: Which Saves You Money?
How to Reduce Taxable Income
Everyone wants to pay the lowest IRS tax bill possible. Here are some ways you can try to reduce your taxable income:
- Maximize contributions to retirement accounts. Contributions to an employer-sponsored 401(k) plan are tax-deferred, so you won't pay taxes on anything you put into your account until you withdraw the money in retirement. If you're looking to minimize your taxable income, you can contribute more to your 401(k) account for the year—up to $23,500 for 2025 and up to $24,500 in 2026.
- Take advantage of tax deductions and tax credits. Explore which tax deductions and tax credits you might qualify for, such tax deductions for charitable contributions or the 2025 child tax credit, which provides as much as $2,200 per qualifying child under age 17.
- Contribute to your health savings account. If you've got a high-deductible health plan, you might qualify for a health savings account (HSA). Contributions to an HSA are made pretax, which decreases your taxable income. Furthermore, under certain circumstances, money in an HSA can grow on a tax-deferred basis and withdrawals can be tax-free.
Learn more: Best Ways to Lower Your Taxes
Making Your Taxes Less Taxing
Figuring out your taxable income can be taxing. Do you have to count a $15,000 withdrawal from a 401(k) as taxable income? Will the $2,500-a-month alimony payment you receive push you into a higher tax bracket? If you keep your tax records organized throughout the year, you can lessen the burden of calculating your taxable income and completing your tax return.
If you'd prefer to avoid all that number crunching, contact an accountant or another tax professional for help. They can sort through what parts of your income are and aren't taxable, what deductions and credits you may qualify for and more.
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About the author
John Egan
John Egan is a freelance writer, editor and content marketing strategist in Austin, Texas. His work has been published by outlets such as CreditCards.com, Bankrate, Credit Karma, LendingTree, PolicyGenius, HuffPost, National Real Estate Investor and Urban Land.
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