Taxation: Defining Income FAQs

Internal Revenue Service
  • Are alimony payments considered taxable income?

  • Are child support payments considered taxable income?

  • I received damages for emotional distress suffered as a result of employment discrimination. Is the money I received taxable?

  • I signed a statement not to sue for age discrimination and received a lump-sum payment from my employer. Is this payment taxable?

  • Is the money received from a settlement taxable?

  • Are gifts, bequests, or inheritances taxable?

  • Is the money received from the sale of inherited property considered taxable income?

  • Is money from student loans considered taxable income?

  • I received an academic scholarship that is designated to be used for tuition and books. Is this taxable?

  • Do I need to report income made as a work study student at my college?

  • Are benefits from life insurance taxable income and do they have to be reported?

  • I am receiving long-term disability . Is it considered taxable?

  • My Form W-2 includes allocated tips . What are they and how are they taxed?

    Q: Are alimony payments considered taxable income?

    A: Alimony, separate maintenance and similar payments from your spouse or former spouse are taxable to you in the year received.

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    Q: Are child support payments considered taxable income?

    A: No. Some types of income taxpayers receive aren't taxable and child support is one of them. When you total your gross income to see if you are required to file a tax return, don't include your nontaxable income.

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    Q: I received damages for emotional distress suffered as a result of employment discrimination. Is the money I received taxable?

    A: Employment discrimination is not considered a physical injury or sickness. So damages for emotional distress are considered income, except to the extent they're paid for medical care attributable to emotional distress.

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    Q: I signed a statement not to sue for age discrimination and received a lump-sum payment from my employer. Is this payment taxable?

    A: A lump-sum payment for cancellation of your employment is taxable income in the year you receive it and must be reported with your other salary and wages. This is true even if the payment was received (by suit or agreement) as settlement under the Age Discrimination in Employment Act.

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    Q: Is the money received from a settlement taxable?

    A: To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item which the settlement replaces. Include the following as ordinary income:
    • Interest on any award
    • Compensation for lost wages or lost profits in most cases
    • Punitive damages. (But see below)
    • Amounts received in settlement of pension rights (if you did not contribute to the plan)
    • Damages for
      • Patent or copyright infringement
      • Breach of contract
      • Interference with business operations
    • Any recovery under the Age Discrimination in Employment Act
    • Damages to your character
    • Alienation of affection

    Don't include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

    Damages for emotional distress due to a physical injury or sickness aren't taxable.

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    Q: Are gifts, bequests or inheritances taxable?

    A: Generally, property you receive as a gift, bequest, or inheritance isn't included in your income. But if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you.

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    Q: Is the money received from the sale of inherited property considered taxable income?

    A: To determine if the sale of inherited property is taxable, you must first determine the basis (your cost) of the property. If you sell property for more than your basis, you have a gain on the sale that would be considered income.

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    Q: Is money from student loans considered taxable income?

    A: A school loan is not taxable at the time you get the money and should not be included as income on your return. A loan is not income because you are expected to repay the amount borrowed (plus interest). If, at a later date, any part of the loan is "forgiven" (so that you don't have to pay it), the amount forgiven would be income in that year.

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    Q: I received an academic scholarship that's designated to be used for tuition and books. Is this taxable?

    A: Qualified scholarships and fellowships are treated as tax-free amounts if all of the following conditions are met:
    • You're a candidate for a degree at an educational institution
    • Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction, and
    • The amounts received are not a payment for your services

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    Q: Do I need to report income made as a work-study student at my college?

    A: If you're enrolled in a state or local work-training program under the Economic Opportunity Act of 1964, payments you receive as compensation for services are wages and reportable as gross income.

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    Q: Are benefits from life insurance taxable income and do they have to be reported?

    A: Generally, if you receive the proceeds because of the death of the insured person, the benefits aren't taxable income and don't have to be reported. Any interest you receive would be taxable and would need to be reported just like any other interest received.

    However, if the policy was turned over to you for a price, the proceeds are taxable.

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    Q: I am receiving long-term disability. Is it considered taxable?

    A: Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan paid for by your employer.

    If both you and your employer have paid for the premiums of the plan, only the amount you receive for your disability that is due to your employer's payments is reported as income.

    If you pay the entire cost of a health or accident insurance plan, don't include any amounts you receive for your disability as income on your tax return.

    If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium wasn't included as taxable income to you, the premiums are considered paid by your employer and the disability benefits are fully taxable.

    Refer to Publication 525, Taxable and Nontaxable Income, for more details. If the amounts are taxable, you can submit a Form W-4S, Request for Federal Income Tax Withholding, to the insurance company, or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals.

    Amounts you receive from your employer while you're sick or injured are part of your salary or wages. Report the amount you receive on line 7, Form 1040; line 7, Form 1040A; or line 1, Form 1040EZ. You must include in your income sick pay from any of the following:

    • A welfare fund.
    • A state sickness or disability fund
    • An association of employers or employees
    • An insurance company, if your employer paid for the plan

    Payments you receive from qualified long-term care insurance contracts are generally excluded from income as reimbursement of medical expenses received for personal injury or sickness under an accident and health insurance contract. Also, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits) can be excluded from income.

    You may be able to deduct your out-of-pocket expenses for medical care above any reimbursements, if you are eligible to itemize your deductions. You will need to review Publication 502, Medical and Dental Expenses.

    For more information, refer to Publication 907, Tax Highlights for Persons with Disabilities.

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    Q: My Form W-2 includes allocated tips. What are they and how are they taxed?

    A: Certain employers must allocate tips if the percentage of tips reported by employees falls below a required minimum percentage of gross sales. To "allocate tips" means to assign an additional amount as tips to each employee whose reported tips are below the required percentage.

    For additional information on how the rules for tip allocation work, refer to Chapter 7 of Publication 17, Your Federal Income Tax.

    All tips you receive are taxable. If you don't have adequate records for your actual tips, you must include the allocated tips shown on your Form W-2 as additional tip income on your return. You must also complete and attach Form 4137, Social Security and Medicare Tax on Unreported Tips. For more information on the requirements, refer to Tip Allocation in Publication 531, Reporting Tip Income.

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