Family Income

• Many types of nontaxable income involve money to support families. For example, disaster relief payments are nontaxable for people who lose their homes and possessions in a natural disaster. Income that takes the form of child support payments from a divorced spouse is also nontaxable. Foster care givers are also not responsible for paying tax on the money they receive to care for foster children.
  
  

Health-Related Income

• Some forms of health-related income are nontaxable, regardless of their amounts. This includes benefits workers receive for black lung disease. It also extends to income from dependent care assistants for military personnel, Supplemental Security Income, regular worker's compensation benefits and veterans benefits. Income from damages in a lawsuit involving disability or illness is also nontaxable, whether it pertains to physical or emotional illness. Insurance disability payments are nontaxable if the policyholder purchased coverage with taxed income, but if the taxpayer used pretax contributions to purchase the insurance, its payouts are taxable.
  
  

Corporate Income

• Many business pay income taxes each year on the profits they make after deducting operating expenses. However, some corporations, known as S corporations, do not pay tax on their business income. Instead, the IRS allows S corporations to calculate their income and losses as part of their financial accounting processes. S corporations submit tax returns, but the tax liability for profits passes to stockholders, who pay capital gains taxes when they sell their shares for profits in the future.
  
  

Taxable Income

• Most other forms of income are taxable according to the federal Tax Code. This includes employee compensation such as wages, tips, bonuses and fringe benefits. It also includes most forms of investment income, including profits from stock sales, interest on bank accounts and stock dividends. Unless you can determine that income you receive is nontaxable, you should claim it as income to avoid a tax underpayment, which can result in a costly penalty.