IRS Publication 525

IRS Publication 525: Taxable and Nontaxable Income

Key takeaways
* Publication 525 explains which types of income the IRS treats as taxable or nontaxable.
* Income can be money, property, or services — and is taxable unless law specifically exempts it.
* The publication covers ordinary wages and many less obvious income sources and is updated to reflect tax-law changes.

Overview
Publication 525, Taxable and Nontaxable Income, is the IRS guidance that helps taxpayers and preparers determine what must be reported and taxed. It covers income from employment, investments, business activities, benefits, and special situations, and explains exceptions and reporting rules for different types of taxpayers.

What Publication 525 covers
* How to treat pay from retirement plans, stock options, and fringe benefits.
* Reporting rules for income from partnerships, rental real estate, and pensions (including disability pensions).
* Special rules for certain workers, such as military personnel and clergy.
* Updates for temporary relief measures (for example, disaster-related tax relief).

Taxable income — principles and examples
Principles
* Any income is taxable unless a law specifically excludes it.
* Income is taxable when it is available to the taxpayer — even if not yet cashed or actually in the taxpayer’s possession.
* Income received by an agent on behalf of the taxpayer is generally taxable to the taxpayer.
Examples
* Salaries, wages, tips, and self‑employment earnings.
* Prepaid amounts received for services or work performed after year‑end (e.g., advance payments to contractors).
* Grants (unless a specific law excludes them) and most interest from investments.
* Fringe benefits, unless specifically excluded by statute.

Nontaxable income — common examples
The IRS lists many exclusions; common non-taxable items include:
* Welfare and certain public assistance payments.
* Most health‑care benefits (subject to specific rules).
* Inheritances and gifts (generally not taxable to the recipient).
* Child support payments.
* Cash rebates on purchases and certain reimbursements (e.g., qualifying adoption expense reimbursements).
* Life insurance proceeds received because of the insured’s death (but policy cash‑outs may be taxable).
* Certain scholarships and fellowships — taxability depends on how funds are used (qualified education expenses vs. room and board, for example).

Special situations to watch
* Agent receipts: Money received by a third party on a taxpayer’s behalf is usually includible in the taxpayer’s income.
* Prepayments and advances: Payments received before work is completed are typically taxable in the year received.
* Life insurance: Death benefits are generally excluded, but cashing in a policy or surrendering it may produce taxable income.
* Scholarships and grants: Portions used for tuition and required fees may be excludable; other uses (living expenses) often are taxable.
* Disaster and temporary relief: The IRS may issue temporary rules (e.g., disaster relief) that change tax treatment for affected taxpayers.

Using Publication 525
Publication 525 is a starting point for identifying reportable income and understanding exceptions. Because tax law changes and special relief provisions can alter treatment, consult the current version of Publication 525 from the IRS or a tax professional when preparing returns or resolving questions about specific income items.

Conclusion
Publication 525 provides practical guidance on what to include on your tax return and what can be excluded. When in doubt about a specific type of income or its timing, refer to the latest IRS guidance or seek professional advice.