Taxable and Non-Taxable Income

A lot of clients are unsure about what income has to be reported for tax purposes. We answer the most common questions below.

U.S. citizens and resident aliens, i.e., green card holders, must report their worldwide income, even if it wasn't earned in the U.S. Nonresident aliens's (NRA) have to follow the same rule, if they file jointly with their U.S.-citizen spouses.

One issue that causes a lot of confusion and some really awful penalties is the foreign earned income exclusion. The rule is very simple: all wages have to be reported. Even if the wages qualify for the foreign earned income exclusion, they must be reported to be eligible for favorable tax treatment. If you don't report the foreign earned income, you may lose the right to exclude it, which may increase your tax bill by many thousands of dollars.

For military personnel, basic pay, flight pay, foreign duty pay, incentive pay, continuation pay, hazardous duty pay, proficiency pay, all bonuses, and separation pay are all taxable.

BAQ, BAS, and all other allowances, are non-taxable. Per diem received for TDY is also non-taxable, provided the amount received does not exceed TDY expenses.

All interest income, including nontaxable interest, has to be reported, even if it was never withdrawn from your bank account. All dividend income, including non-taxable dividends, has to be reported too, including reinvested dividends that were never withdrawn from your account. If the taxable amount or interest or dividends is less than $400, put it directly on line 8 or 9, respectively, of the 1040. If it is more than $400, then fill out Schedule B too. The only exception is that interest and dividends from IRA accounts isn't reported until you withdraw the money from the IRA.

Self-employment income from working at home is reported on Schedule C.

Gambling winnings from bingo, slot machines, etc., have to be reported on Form 1040, line 22.

Now for the good news. A lot of income items don't have to be reported and aren't taxable. Federal income tax refunds are never taxable. State tax refunds aren't taxable either, unless you itemized the year before, and then they might be. Gifts and inheritances aren't taxable, and neither are welfare payments and child support. Spousal support received pursuant to military regulations is not taxable, but spousal support received pursuant to a written separation agreement or court order is taxable.

Remember, each case is different. This summary gives you general information only. It is not a substitute for talking with a lawyer. You may consult a legal assistance attorney.

For more tax information, contact your Unit Tax Advisor or the Tax Assistance Center at 684-4986.