Types of Income According to the IRS

The IRS lists 22 different types of income that an individual taxpayer potentially needs to report on their Form 1040. This article explains some of the more frequently reported types.

Some Commonly Reported Types of Income (A-Z order)

Tax Rates by Income Type

Business income (payments that a taxpayer receives from selling products or services) must be included in income. A payment in the form of property or services is included in income at fair market value.

Capital gain or capital loss occurs if the taxpayer sells a capital asset, and calculates the difference between the assets adjusted basis and the amount realized on the sale. Most items owned and used for personal or investment purposes, including homes, furnishings, and stocks and bonds, are capital assets. A capital gain or loss is either long-term (held for more than one year) or short-term (held for one year or less).

Cash, property, or services that the taxpayer receives for the use of real or personal property are included as rental income, although the expenses of renting the property are generally deductible.

Dividends that a corporation pays a shareholder in cash or other property is included in the shareholder's income. Additional dividends may result if the corporation pays a shareholder's debt, provides services to a shareholder, or allows a shareholder to use corporate property. The corporation provides dividend information on Form 1099-DIV.

Interest that must be reported includes interest on bank accounts, money market accounts, and certificates of deposit (CDs); interest from Treasury bills, notes, and bonds; some types of savings bond interest; and, possibly, part of the original issue discount (OID) on a bond or note originally issued at a discount. These amounts are provided to the taxpayer on Forms 1099-INT and 1099-OID.

Pension or annuity payments from qualified retirement plans may be incredible in income.

Scholarships, fellowship grants, and other grants are tax-free if: (1) the recipient is a candidate for a degree at an educational institution with a regular faculty, regular curriculum, and a regularly enrolled student body, and (2) the recipient uses the amounts received for tuition, fees, or required supplies and equipment. Otherwise, the amounts received may be taxable.

Some unemployment benefits, including state unemployment insurance benefits, Federal Unemployment Trust Fund benefits, and railroad unemployment compensation benefits, are included in income.

Wages and salaries, which are amounts that the taxpayer receives for working as an employee, are included in gross income. The wage and salary incomes that must be reported are usually shown on a W-2 form that the employer provides to the employee.

Other Types of Included Income

A taxpayer may also need to report lump-sum distributions, retirement plan rollovers, farming and fishing income, clergy earnings, gambling income, bartering income, Social Security and railroad retirement benefits, certain deferred wages under a 401(k) plan, income from passive activities, stock options, income from a trading business, stock received in a demutualization, and debt cancellation income.

Quiz: Workers' Compensation Benefits, Are They Taxable?


True or False: Those who receive workers' compensation benefits must pay taxes on that income in the next filing year. Answer
False. Workers' compensation benefits are not regarded typically as taxable income by the IRS, or at the state level, unless the filer also received disability benefits through Social Security disability insurance (SSDI) or Supplemental Security Income (SSI).

True or False: A "workers' compensation offset" can reduce a "double benefit" penalty. Answer
True. To avoid a year-end tax liability, the Social Security Administration (SSA) can use what is called a "workers' compensation offset" to reduce a SSDI or SSI payment for those who received workers' compensation to remain below a certain threshold.

To do this, the SSA reduces the amount of workers' compensation that is taxable by reducing the same amount in SSDI or SSI payments. For example, if SSA lowers your monthly SSDI check by $350 in a "workers' compensation offset," that is because $350 of workers' compensation would be taxable. The offset lowers combined income to eliminate the tax liability.

True or False: If collecting workers' compensation benefits, any concurrent receipt of retirement benefits is nontaxable. Answer
False: Although workers' compensation income is generally nontaxable, any retirement benefits the filer is receiving — even if the recipient is eligible to receive retirement benefits because of an illness or injury that precipitated the workers' compensation claim — are not exempt from taxation.

True or False: Wages earned while receiving reduced workers’ compensation benefits are not taxable. Answer
False. Most people who receive workers' compensation eventually return to work in some capacity, often on a part-time or a light work situation, and are still eligible to receive a portion of their benefits. However, any wages earned while still receiving workers' compensation benefits are taxable.

True or false? Interest accrued in delayed worker’s compensation payments is taxable. Answer
True. Occasionally, an employer or insurance company will challenge a workers’ compensation claim. If the claim is eventually awarded, interest is assessed on delayed payments. That interest is considered taxable income.

True or False: Workers' compensation benefits paid to survivors after a worker's death are not taxable. Answer
True. Death benefits are generally limited to spouses, children and other family members dependent upon the deceased worker for financial support. They are typically two-thirds of the deceased employee’s average weekly wage, although the amount can vary by state.

These benefits can be paid in weekly installments or, in some states, in lump sums. In many states, a spouse can receive benefits until death or remarriage while children can typically receive them until they turn 18 or depending on circumstances, they complete post-secondary education or vocational training. Regardless, these benefits are tax-free.

Ready to File Your Return? Start Today

Start Your Tax Filing Now
E-file Pixel