Under federal law, most money you receive is taxable income unless a specific rule excludes it. What income is taxable and what is not comes down to the source and the conditions: wages, unemployment benefits, gambling winnings and most settlements are taxed, while gifts, inheritances, child support and compensation for a physical injury generally are not. A third group, including Social Security, scholarships, canceled debt and rental income, depends on the numbers.
Key takeaways
- The default is "taxable": pay for personal services counts even when no W-2 or 1099 arrives.
- Not taxable to the person who receives it: gifts and inheritances (the income they later earn is taxable), child support, and compensatory damages for a physical injury or physical sickness.
- Social Security is taxable only above fixed base amounts of $25,000 (single) and $32,000 (married filing jointly), and no more than 85% of benefits can be taxed.
- Tips and overtime remain taxable, but for 2025 through 2028 a deduction of up to $25,000 for qualified tips and $12,500 ($25,000 joint) for qualified overtime premium pay is available to eligible workers with a valid Social Security number who, if married, file jointly.
- Canceled debt is income unless an exclusion such as bankruptcy or insolvency applies; the insolvency exclusion is capped at the amount of insolvency.
What income is taxable at a glance
The table below follows IRS Publication 525, Taxable and Nontaxable Income, 2025 edition. Where a year matters, it is stated, and the sections below explain the rows that depend on conditions.
| Type of money | Federal income tax treatment | What changes the answer |
|---|---|---|
| Wages, salaries, commissions, bonuses | Taxable | Counts even if no Form W-2 arrives |
| Tips | Taxable | A separate deduction may apply for qualified tips, 2025 through 2028 |
| Overtime pay | Taxable | A deduction may apply to the premium portion, 2025 through 2028 |
| Unemployment benefits | Taxable | Reported on Form 1099-G |
| Gifts and inheritances received | Not taxable to the recipient | Income the property later earns is taxable; inherited IRAs and pensions can be partly taxable |
| Child support received | Not taxable | Not alimony, so no deduction for the payer either |
| Alimony received | Depends | Taxable under pre-2019 instruments; not taxable under instruments executed after 2018 |
| Social Security benefits | Depends | Up to 50% or 85% taxable above base amounts |
| Settlements and court awards | Depends | Physical injury compensation is excluded; lost wages, punitive damages and most others are taxed |
| Scholarships and fellowships | Depends | Tuition and required course costs excluded for degree candidates; room and board is taxed |
| Rent from a home you also live in | Depends | Not reported if rented fewer than 15 days in the year |
| Canceled debt (Form 1099-C) | Depends | Excluded in bankruptcy or when insolvent, up to the insolvency amount |
| Gambling winnings, lottery prizes | Taxable | Losses deductible only if you itemize |
| Digital assets | Depends | Taxable when received as payment, sold or exchanged; buying with dollars is not a taxable event |
This is general educational information for federal income tax, not advice for a specific return. State tax rules differ and are not covered here.
Work income, tips and overtime
Publication 525 tells filers to include in gross income everything received in payment for personal services. Digital assets an employer pays for services count at their fair market value on the date received.
The 2025 through 2028 tips and overtime deductions
The 2025 tax law, Public Law 119-21 (widely called the One, Big, Beautiful Bill), created two deductions. They are deductions, not exclusions: the money is still income. The limits and conditions below come from 26 U.S.C. 224 (tips), 26 U.S.C. 225 (overtime) and the IRS guidance for tax year 2025:
- Qualified tips: up to $25,000 a year. The tips must be voluntary cash or charged tips received in an occupation on the IRS list of jobs that customarily received tips on or before December 31, 2024, and they must appear on a Form W-2, Form 1099 or other statement, or be reported on Form 4137. Tips earned in a "specified service trade or business" as defined in section 199A, or from an employer in one, do not qualify. For the self-employed, the deduction cannot exceed the business's net income.
- Qualified overtime: only the overtime premium that the Fair Labor Standards Act requires, generally the "half" in time-and-a-half. Overtime paid only because of state law, a union contract or employer policy does not count, and neither does the extra portion of double time. FLSA-exempt employees have no qualified overtime. The maximum is $12,500 a year ($25,000 for joint filers).
- Phase-out: each deduction drops by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 for joint filers).
- Who can claim: taxpayers with a Social Security number valid for employment; married couples must file jointly. Itemizers and non-itemizers can both claim, for tax years 2025 through 2028, on Schedule 1-A.
Illustrative example: an employee with a $20 regular hourly rate is paid time-and-a-half, $30 an hour, for 100 overtime hours. The $3,000 of overtime wages is all taxable and stays in W-2 wages. Only the $10 premium per hour counts, so $1,000 can be deducted, subject to the eligibility rules and income limits above.
Unemployment, gambling and similar income
Unemployment compensation is included in income, and a state agency reports it on Form 1099-G. Gambling winnings, including fantasy sports and lottery or raffle prizes, are taxable.
Gambling losses can be deducted only if you itemize, and only up to the winnings. Publication 505 (2026) notes that beginning in 2026 the Schedule A deduction is limited to the lesser of 90% of gambling losses or gambling winnings.
Illustrative example: a taxpayer with $10,000 of winnings and $10,000 of losses in 2026 reports the full $10,000 as income. If itemizing, they can deduct $9,000 (90% of $10,000), so $1,000 stays taxable even though they broke even; through 2025, the full $10,000 was deductible. A filer who takes the standard deduction deducts none of the losses.
How Social Security gets taxed
The test in IRS Publication 915 adds half of your benefits to your other income, including tax-exempt interest, and compares the total with a base amount for your filing status. The base amounts are fixed dollar figures in 26 U.S.C. 86, with no inflation adjustment, so they apply to 2026 benefits as well:
- $25,000 for single, head of household and qualifying surviving spouse filers.
- $32,000 for married filing jointly.
- $0 for married filing separately if you lived with your spouse at any time during the year; $25,000 if you lived apart all year.
Generally up to 50% of benefits are taxable. Up to 85% can be taxable if the total exceeds $34,000 ($44,000 married filing jointly), or if you are married filing separately and lived with your spouse during the year. Benefits are reported to you on Form SSA-1099.
The new senior deduction of $6,000 for each person 65 or older, for 2025 through 2028 and phased out above $75,000 of modified adjusted gross income ($150,000 joint), is separate: the benefit test above is unchanged, so it does not by itself make benefits tax-free.
| Illustrative single filer (benefits $24,000) | Other income | Other income plus half of benefits | Taxable benefits |
|---|---|---|---|
| Case A | $20,000 | $32,000 | $3,500 (14.6% of benefits) |
| Case B | $40,000 | $52,000 | $19,800 (82.5% of benefits) |
Both cases assume no tax-exempt interest. Case A: the $32,000 total is $7,000 over the $25,000 base amount, and 50% of that is $3,500, which is less than half the benefits ($12,000). Case B: the total is $18,000 over $34,000, and 85% of that is $15,300, plus $4,500 (50% of the $9,000 between $25,000 and $34,000), giving $19,800, below the 85% ceiling of $20,400. For a real return, use the Publication 915 worksheet.
Gifts, settlements and support
Gifts and inheritances
Property received as a gift, bequest or inheritance is generally not income to the person who receives it. Interest, dividends or rent that the property produces afterward is taxable, and part of an inherited pension or IRA may be taxable.
The gift tax is a separate matter and falls on the giver, not the receiver. For calendar year 2026, the first $19,000 of gifts to any one person is not counted toward the giver's taxable gifts, as Revenue Procedure 2025-32 sets out (the 2025 figure was also $19,000, per the IRS estate and gift tax page). Gifts of future interests are handled differently, and a separate, higher limit applies to a spouse who is not a US citizen.
Settlements and court awards
What matters is what the settlement replaces. Compensatory damages for personal physical injury or physical sickness are not income, whether paid in a lump sum or in installments. Emotional distress damages follow the underlying claim: if they flow from a physical injury, they are excluded, but if they come from something like discrimination or injury to reputation, they are included, except for amounts received for medical care.
Taxed as ordinary income: interest on an award, compensation for lost wages or profits in most cases, punitive damages in most cases (even in a physical injury case), and damages for breach of contract or patent infringement. Attorney fees, including contingent fees, are included where the recovery is taxable.
Scholarships, child support and alimony
A degree candidate can exclude a qualified scholarship or fellowship: required tuition and enrollment fees, and course fees, books and equipment required of all students in the course. Room and board does not qualify, and pay for required teaching, research or other services is generally taxable.
Child support is not reported on the recipient's return. Alimony depends on the date of the divorce or separation instrument. Publication 504 says alimony is taxable to the recipient, and deductible by the payer, under an instrument executed before 2019. For an instrument executed after 2018, it is neither. An older instrument changed after 2018 switches to the new treatment only if the modification expressly says so.
Debt, property and digital income
Canceled debt
Canceled debt is usually income. A financial institution, credit union or federal agency may send Form 1099-C, with the canceled amount in box 2. Exclusions include debt canceled in a bankruptcy case or while you are insolvent; the insolvency exclusion cannot exceed the amount of insolvency, and exclusions are claimed on Form 982.
As of November 2026, the exclusion for qualified principal residence debt covers only debt discharged before January 1, 2026, or under a written arrangement entered into before that date, under 26 U.S.C. 108, so mortgage debt forgiven in 2026 without such an arrangement generally needs another exclusion, such as insolvency.
Illustrative example: a lender cancels $10,000 of credit card debt. Just before the cancellation, the borrower's debts total $60,000 and the assets are worth $52,000, so the borrower is insolvent by $8,000. Of the $10,000, $8,000 can be excluded and $2,000 is taxable income.
The 14-day rental rule
If you use a home as a residence and rent it fewer than 15 days in the year, you do not report the rent, and the related expenses are not rental expenses, according to Publication 527. Under 26 U.S.C. 280A, a home counts as a residence if your personal use exceeds the greater of 14 days or 10% of the days it is rented at a fair price. Mortgage interest, property taxes and qualified casualty losses are reported as usual on Schedule A. Rent it for 15 days or more and the rent is reportable, with expenses split between rental and personal use.
Cryptocurrency
Per the IRS digital assets page, receiving digital assets as payment for property or services, as a reward, through mining or staking, or from an airdrop after a hard fork is taxable. Selling or exchanging them, or paying with them, is also a taxable event even if there is no gain or loss to report. Buying digital assets with US dollars and holding them is not taxable.
Frequently asked questions
Do I report wages if my employer never sent a W-2?
Yes. Publication 525 says to include all pay even if you do not receive a Form W-2, or if the W-2 leaves some pay out. Final pay stubs help reconstruct the amount.
Is money from an inherited IRA taxable?
It can be. Inheritances are generally not income, but a person who inherits a pension or an IRA may have to include part of it in income. Publication 525 refers to Publications 575, 590-A and 590-B for the details.
Are noncash lottery prizes such as a car taxable?
Yes. Lottery and raffle winnings are gambling winnings, and noncash prizes are included at fair market value in addition to any cash. A narrow exception exists for the difference between market value and cost of certain government oil and gas leases won in a lottery.
Is moving crypto between my own wallets a taxable event?
Not by itself. The IRS says moving digital assets between wallets or accounts you own or control does not require a "Yes" on the digital asset question, unless you paid a transfer fee in digital assets, which is a disposal that can be taxable.
Are attorney fees in a taxable settlement taxable too?
Yes, where the underlying recovery is taxable, Publication 525 includes attorney fees and costs, contingent fees included, in income. In certain unlawful discrimination and similar cases, the fees may be deductible as an adjustment on Schedule 1.
A checklist before you file
- Sort each form (W-2, 1099-G, SSA-1099, 1099-C) against the table above, and look for income with no form, such as tips, gambling or crypto.
- For Social Security, add half your benefits to your other income and compare the total with $25,000 or $32,000.
- For a settlement, write down what the payment replaces and keep the settlement agreement.
- For canceled debt, list assets and debts just before the cancellation to test for insolvency.
- If you earned tips or overtime in 2025 or 2026, confirm that your job is on the IRS tipped-occupations list or that your overtime is FLSA-required, and check the Schedule 1-A instructions for the year you are filing.
Sources
- IRS Publication 525, Taxable and Nontaxable Income (2025)
- IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits (2025)
- IRS news release on tips and overtime deductions, tax year 2025
- IRS, New tax deductions for working Americans and seniors
- IRS Fact Sheet FS-2026-04, Schedule 1-A, Additional Deductions
- 26 U.S.C. 86, Social Security and tier 1 railroad retirement benefits
- 26 U.S.C. 224, Qualified tips and 26 U.S.C. 225, Qualified overtime compensation
- 26 U.S.C. 108, Income from discharge of indebtedness
- 26 U.S.C. 280A, including (g), rental of a residence for less than 15 days
- IRS Revenue Procedure 2025-32 (2026 inflation adjustments)
- IRS, What's new: estate and gift tax
- IRS Publication 504, Divorced or Separated Individuals (2025)
- IRS Publication 527, Residential Rental Property (2025)
- IRS Publication 505, Tax Withholding and Estimated Tax (2026)
- IRS, Digital assets
