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Is all income taxable or are there exceptions?

Uncle Sam has been hard up for cash in recent years. Last year, for example, the long-running budget battles between the president and Congress led to a partial shutdown of the federal government that lasted for more than two weeks.

But just because the U.S. government needs revenue does not mean that every conceivable type of income is taxable. That just isn't the way the federal tax code is set up.

In this post, we will discuss the difference between taxable and nontaxable income.

To be sure, most sources of income are taxable. Wages are perhaps the most obvious example of this.

Indeed, the federal tax code also considers the benefits of barter transactions to be income.

Sometimes, however, there is a question about whether a benefit to a taxpayer is properly considered income.

For example, in a technical sense there may be “income” for a taxpayer when a debt is cancelled. But when the debt cancellation comes as a result of a foreclosure, and the taxpayer is already experiencing financial hardship, it hardly seems fair to consider getting out from under a mortgage to be “income.”

That is why there has been controversy about allowing an income tax exemption in the context of mortgage debt forgiveness. We discussed that issue in our January 2 post.

There are also certain types of income that are generally not taxable under the federal tax code. Examples include:
• Personal injury damage awards
• Gifts
• Bequests and inheritances
• Child support
• Welfare benefits

In short, it’s true that the general rule is that income is taxable unless the tax code provides otherwise. But there are also exceptions. In other words, the IRS is not always right in a tax controversy about whether a particular item is properly subject to income tax.

Source: IRS.gov, "Taxable and Nontaxable Income," Accessed June 18, 2014

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