What Are the Types of Income? Taxable, Nontaxable, and Foreign

Federal tax law starts from a simple rule: every dollar you receive counts as gross income unless a specific statute says otherwise.¹ From there, the tax code sorts your money into categories, and the category matters because each one carries its own rate, its own forms, and its own deductions. The types of income that are taxable include wages, self-employment profits, passive activity earnings, interest and dividends, capital gains, retirement withdrawals, part of your Social Security benefits, canceled debts, digital asset transactions, gambling winnings, and unemployment compensation. The non-taxable side is narrower and specific: gifts and inheritances, life insurance death benefits, child support, workers’ compensation, most veterans’ benefits, and qualified Roth distributions.

Wages, Salaries, and Other Earned Income

Earned income is money paid to you for work you personally perform. Wages, salaries, tips, commissions, and professional fees all belong here. Your employer withholds Federal Insurance Contributions Act taxes from each paycheck: 6.2% for Social Security and 1.45% for Medicare, a total of 7.65%.² Your employer pays a matching 7.65%, bringing the combined funding to 15.3% of your pay.

Higher earners owe an extra 0.9% Additional Medicare Tax on wages above $200,000 for single filers, $250,000 for joint filers, and $125,000 for married filing separately.³ Employers begin withholding it once your wages pass $200,000 in a calendar year, and you reconcile any difference from your filing-status threshold on your return.

On top of payroll taxes, earned income is subject to federal income tax at ordinary rates. Those brackets run from 10% to 37% for 2026, depending on taxable income and filing status.⁴ Missing the filing or payment deadline can add penalties of up to 25% of the unpaid tax.⁵

Self-Employment and Business Income

Run your own business as a sole proprietor, freelancer, or independent contractor, and your net profit is business income taxed at ordinary rates.¹ You calculate that profit on Schedule C by subtracting business expenses from gross receipts.

Since no employer is splitting payroll taxes with you, you pay the full 15.3% Social Security and Medicare rate on your net earnings, figured on Schedule SE.⁶ The employer-equivalent half is deductible when you compute adjusted gross income. The 0.9% Additional Medicare Tax also applies once your self-employment earnings clear the threshold for your filing status.³

Many self-employed taxpayers and pass-through business owners can also claim the Section 199A deduction of up to 20% of qualified business income. For 2026, it begins phasing out at roughly $201,750 in taxable income for most filers and $403,500 for joint filers, with the exact treatment depending on the type of business.⁴ Starting in 2026, anyone with at least $1,000 in qualified business income can claim a minimum $400 deduction even if 20% of that income would be less.

Passive Income

Passive income comes from a business activity or rental property you don’t actively run.⁷ Think of a silent partnership stake or rental property handled entirely by a manager. The dividing line is whether you materially participate. The most common test asks whether you worked more than 500 hours in the activity during the year.⁸

The stakes here are the loss rules. You can generally deduct passive losses only against passive income, not against wages or investment returns. Unused losses carry forward to future years when you have passive gains to offset. Keeping records of your hours and involvement matters if the IRS ever questions the classification.

Portfolio and Investment Income

Portfolio income is what your money earns rather than what your labor earns: interest from bank accounts, dividends from stocks, and capital gains from selling investments. The statute specifically walls these off from the passive category, so passive losses cannot offset them.⁹

Interest and Dividends

Interest from savings accounts, certificates of deposit, and bonds is taxed at ordinary income rates. Dividends split in two: ordinary dividends taxed at your regular rate, and qualified dividends taxed at the lower long-term capital gains rates. Banks and brokerages send Form 1099-INT for interest and Form 1099-DIV for dividends.

Capital Gains

Sell an investment for more than you paid, and the profit is a capital gain. Holding period sets the rate. Short-term gains on assets held a year or less are taxed as ordinary income. Long-term gains on assets held longer than a year qualify for reduced rates of 0%, 15%, or 20%, tied to your taxable income and filing status.¹⁰ For 2026, single filers with taxable income up to roughly $49,000 pay 0% on long-term gains, and the 20% rate begins around $534,000 for singles and $600,000 for joint filers.

Net Investment Income Tax

An additional 3.8% surtax hits high-income taxpayers on the lesser of their net investment income or the amount their modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).¹¹ Net investment income includes interest, dividends, capital gains, rental income, and royalties.¹² These thresholds are not adjusted for inflation.

Retirement Account Withdrawals

Money you take out of a traditional 401(k) or traditional IRA is taxed as ordinary income in the year of distribution.¹³ Contributions went in tax-deductible or pre-tax, so the IRS collects when the money comes out. Withdrawals before age 59½ usually carry an extra 10% early distribution penalty on top of regular income tax.

Roth IRAs flip that arrangement. Contributions are made with after-tax dollars, and qualified distributions taken after age 59½ and at least five years after your first contribution come out entirely tax-free.¹⁴ Which account holds your retirement savings drives how much taxable income you report each year in retirement.

Social Security Benefits

Part of your Social Security benefits may be taxable, and the calculation runs off your combined income: adjusted gross income plus nontaxable interest plus half of your benefits. If that total tops $25,000 for single filers or $32,000 for joint filers, up to 50% of benefits become taxable. Above $34,000 (single) or $44,000 (joint), up to 85% may be taxed.¹⁵ If you’re married filing separately and lived with your spouse during the year, up to 85% is taxable regardless of income.¹⁶

Starting with the 2025 tax year, taxpayers age 65 and older can claim an additional deduction of up to $6,000, or $12,000 for joint filers where both spouses qualify. The deduction phases out above $75,000 (single) and $150,000 (joint).⁴ It reduces your overall tax bill but doesn’t change the rules that decide whether Social Security itself is taxable.

Canceled and Forgiven Debt

When a lender forgives debt you owed, the IRS generally treats the canceled amount as taxable income. The lender typically sends Form 1099-C showing how much was written off. If a credit card issuer settles a $15,000 balance for $9,000, the $6,000 written off is usually gross income for the year.

Several exclusions can remove the tax:

Bankruptcy: debt discharged in a Title 11 case is excluded from income.
Insolvency: if your total liabilities exceeded the fair market value of your total assets immediately before the cancellation, you can exclude the forgiven amount up to the amount you were insolvent.
Qualified principal residence debt: forgiven mortgage debt on your main home may be excluded if discharged before January 1, 2026, or under a written arrangement entered into before that date.
Qualified farm and real property business debt: certain forgiven debts tied to farming or real property businesses may qualify.
Student loans: loans canceled under qualifying public service or income-driven repayment programs may be excluded.

Most of these exclusions are claimed by attaching Form 982 to your return, and some require you to reduce future tax attributes such as loss carryovers or basis.¹⁷ The insolvency test in particular requires you to tally all your liabilities against all your assets, retirement accounts included, at the moment of cancellation.

Digital Assets and Cryptocurrency

The IRS treats cryptocurrency, stablecoins, and non-fungible tokens as property, not currency. Selling, exchanging, or spending a digital asset can trigger a taxable event. Sell crypto for more than you paid and you owe capital gains tax, short-term or long-term based on your holding period, on the same rules that govern stocks.

Some digital asset activity is ordinary income instead. Receiving cryptocurrency through mining, staking, or as payment for goods or services means the fair market value at the time you receive it is taxable as ordinary income, reported on Schedule 1.¹⁸

Beginning in 2025, brokers such as crypto exchanges report sales on the new Form 1099-DA, with cost basis reporting for covered assets following for transactions on or after January 1, 2026.¹⁹ You’re responsible for reporting all digital asset transactions whether or not you receive a form.

Other Taxable Income

Plenty of money doesn’t fit the categories above but is still taxable under the broad definition of gross income.¹

Gambling winnings: lottery prizes, casino payouts, sports betting profits, and raffle wins are all taxable. Casinos issue Form W-2G for slot and bingo wins of $1,200 or more, but every dollar is reportable whether or not a form arrives.
Prizes and awards: cash or property from contests or achievement awards is income at fair market value.
Bartering: if you trade services, the fair market value of what you receive is income.
Jury duty pay: the stipend is taxable.
Unemployment compensation: federal and state unemployment benefits are fully taxable at the federal level.

Alimony

Alimony’s tax treatment depends on the date of the divorce or separation agreement. Under agreements executed after December 31, 2018, alimony is neither deductible by the payer nor taxable to the recipient.²⁰ Under older agreements, the payer deducted alimony and the recipient reported it as income. A pre-2019 agreement modified after 2018 can follow the newer rules if the modification specifically says so.

Income That Is Not Taxable

Federal law specifically excludes certain receipts from gross income. Keep documentation for anything in this list so it doesn’t get lumped in with taxable receipts by mistake.

Life insurance proceeds paid to a beneficiary because of the insured’s death are generally excluded.²¹
Gifts and inheritances are excluded from the recipient’s income, though any interest, dividends, or rent the property later produces is taxable. For 2026, a giver can transfer up to $19,000 per recipient per year without even triggering a gift tax return.²²⁴
Child support is not taxable to the recipient and not deductible by the payer.²³
Workers’ compensation benefits for an occupational sickness or injury are fully exempt.²⁴
Most veterans’ disability and education benefits and public assistance payments are not subject to federal income tax.
Qualified Roth IRA distributions that meet the age and five-year holding rules are tax-free.¹⁴

Worldwide Income and Foreign Accounts

U.S. citizens and resident aliens owe tax on income from every source in the world, not only from inside the United States. Foreign wages, business profits, rental income, and investment gains all get reported no matter where you live or where the money was paid.²⁵

To keep the same dollars from being taxed twice, you can claim either the foreign tax credit or the Foreign Earned Income Exclusion. For 2026, qualifying taxpayers living abroad can exclude up to $132,900 of foreign earned income.⁴

Foreign accounts carry a separate reporting duty. If the total value of your foreign financial accounts tops $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network.²⁶ Missing that filing can bring substantial civil penalties even when no additional tax is owed on the money inside.

1
Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
2
Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
3
Internal Revenue Service. Topic No. 560, Additional Medicare Tax
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
6
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
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Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
8
eCFR. 26 CFR 1.469-5T – Material Participation (Temporary)
9
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
10
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
11
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
12
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
13
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
14
Internal Revenue Service. Roth IRAs
15
Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
16
Internal Revenue Service. Publication 915 (2025), Social Security and Equivalent Railroad Retirement Benefits
17
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
18
Internal Revenue Service. Digital Assets
19
Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets
20
Internal Revenue Service. Publication 504 (2025), Divorced or Separated Individuals
21
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
22
Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances
23
Internal Revenue Service. Alimony, Child Support, Court Awards, Damages
24
Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income
25
Internal Revenue Service. U.S. Citizens and Residents Abroad – Filing Requirements
26
FinCEN. Report Foreign Bank and Financial Accounts