Certain streams of income can have different effects on your tax situation because they are taxed in different ways.  For example, not all income is included when it comes to figuring out your tax liability at the end of the year.  When planning a tax strategy, budgeting for taxes, or doing a mid-year review, you can obtain a more accurate idea of what your tax bill will look like if you know how your streams of income are treated by the IRS.  

So here are some generally non-taxable income sources…

Worker’s compensation

Not to be confused with unemployment income, your workers’ compensation (or workers’ comp) income comes as a result of a job-related injury.  Your employer pays for medical expenses and lost wages caused by some type of negligence on the company’s part.  Certain types of workers’ compensation are exempt from taxes.  This means that settlements for an occupational injury, illness, or disability are most likely not included in your taxable income.  Where the situation gets hairy is when you are collecting social security benefits, disability checks, or a combination of both benefits.  Depending on various factors, part of your compensation may be considered taxable income.  It’s best to contact an attorney experienced in workers’ compensation cases for details specific to your situation.

Life Insurance Proceeds

Life insurance proceeds are not taxable income, but any interest that is earned from life insurance investments may be taxable.  Think about it this way: the life insurance policy money isn’t generally taxable, but if you make a profit off of the principal amount, by earning interest or dividends or the sale of the policy to someone else, that profit may be taxable.  There are many different options to choose from when structuring a life insurance policy, so always check with your provider to answer any taxable/non-taxable income questions about your particular policy.

Scholarships and student grant money

For the most part, grants, fellowships and scholarships are considered non-taxable income.   These are some of the best ways to pay for your college education and graduate with as little to no debt as possible.  Scholarships are funded through donations to specific causes from organizations and individuals who want to help students pay for college, and grants are also paid through federal and state taxes as well as donations.  They are basically free money to the student and don’t count towards taxable income. If you pay for your college education with scholarships and Pell grants, that  information will be reported when preparing your tax return, but it won’t be included as taxable income.  However, if the money received is not used for the educational purposes specified, that money can be taxed as income.

Child support

Alimony is taxable to the ex-spouse as income.  However child support, which is paid by the non-custodial parent to the custodial parent of a minor child, is not included as taxable income.  The premise is that the money is used to care and provide for the basic necessities and expenses of raising the couple’s child, therefore it should not be considered income to either parent.  In the same way, the non-custodial parent cannot use child support as a deductible expense to reduce any taxable income.  Basically, you don’t get a credit for taking care of your own kid.

Settlements from court awards

Part or all of any proceeds you receive from lawsuits and settlements may be tax-free.  Court awarded money for compensation of lost wages or profits is generally taxable, because it’s treated as income you would have earned anyway.  However,  if the money is being awarded for “pain and suffering”, it’s non-taxable and does not get included in calculating your gross taxable income.  Let’s say for example that you receive a settlement for injuries sustained in a car accident.  If the other driver’s insurance company pays you for pain and suffering from the injury, it’s generally considered non-taxable income.  
At the state level the laws on what is taxable and nontaxable may be a bit different.  Always check with your state tax department, preferably sooner rather than later.  If you receive an unusual increase in income this year and don’t budget for taxes, you could end up with more taxes to pay at tax time.