Publication 525: Taxable and Nontaxable Income; Introductory Material

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

What's New

Education loan repayment assistance. Beginning in 2004, education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program) or a state education loan repayment program eligible for funds under the Public Health Service Act are not taxable if you agree to provide primary health services in health professional shortage areas. For more information, see Publication 970, Tax Benefits for Education.

Unlawful discrimination claims. You may be able to take a deduction from gross income for attorney fees and court costs paid after October 22, 2004, for actions settled or decided after that date involving a claim of unlawful discrimination, a claim against the United States Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act, but only up to the amount included in gross income for the tax year from such claim. See Court awards and damages, under Other Income.

Elective deferrals. The limit on the amount of your wages you can elect to defer into certain retirement plans (such as section 401(k) plans) increases each year through 2006. If you are age 50 or older, you may be able to make additional catch-up elective deferrals. See Elective Deferrals in the discussion on retirement plan contributions under Employee Compensation.

Health Savings Accounts (HSAs). Beginning in 2004, you may be able to make tax-deductible contributions to a health savings account to pay qualified medical expenses. Amounts from HSAs used for qualified medical expenses are not includible in gross income. Amounts from HSAs not used for qualified medical expenses are includible in income. HSAs are discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Smallpox vaccine injuries. If you are an eligible individual who receives benefits under the Smallpox Emergency Personnel Protection Act of 2003 for a covered injury resulting from a covered countermeasure, you can exclude the payment from your income (to the extent it is not allowed as a medical and dental expense deduction on Schedule A (Form 1040)). Eligible individuals include health care workers, emergency personnel, and first responders in a smallpox emergency, who have received a smallpox vaccination.

Capital gains treatment for certain stock sales to comply with conflict-of-interest requirements. You are considered to meet the holding period requirement and qualify for capital gain treatment for certain sales after October 22, 2004, of stock acquired from the exercise of statutory stock options. SeeStatutory Stock Options under Stock Options.

Reminders

Terrorist attacks. You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Astronauts. You can also exclude death payments for astronauts dying in the line of duty after 2002.

Foreign income. If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

You can receive income in the form of money, property, or services. This publication discusses many kinds of income and explains whether they are taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties. It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Check the index for the location of a specific subject.

Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable.

Constructively received income. You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.

A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year. For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year. If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you could not otherwise get the funds before the end of the year, you include the amount in your income for the next tax year.

Assignment of income. Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it.

Example.

You and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when your former spouse receives it.

Prepaid income. Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment in your income as you earn it by performing the services.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *[email protected]. (The asterisk must be included in the address.) Please put “Publications Comment” on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Tax questions. If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Ordering forms and publications. Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the three addresses shown under How To Get Tax Help in the back of this publication.

Useful Items - You may want to see:

Publication

523 Selling Your Home
527 Residential Rental Property (Including Rental of Vacation Homes)
550 Investment Income and Expenses (Including Capital Gains and Losses)
559 Survivors, Executors, and Administrators
564 Mutual Fund Distributions
575 Pension and Annuity Income
915 Social Security and Equivalent Railroad Retirement Benefits
970 Tax Benefits for Education

See How To Get Tax Help, near the end of this publication, for information about getting these publications.

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