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.

Your taxable income is the amount of your income on which you begin calculating your final tax liability. Nontaxable income is income that is excluded from tax liability.

Taxable income includes the following:

• Your salary, with the exception of money you may have deducted and put into a 401(k) plan
• Interest earned on savings and checking accounts
• Interest on all bonds except municipal (tax-free) bonds and dividends on investments
• Bonuses, severance pay, and sick pay from your employer
• Unemployment compensation
• Tips
• Capital gains on mutual funds and other investments. (Capital gains are the amount by which proceeds from the sale of a capital asset exceed the cost. Essentially, the profit you make.) Although the tax rate on capital gains is different than regular taxable income, it's still considered taxable income.
• Bartering, royalties, and gambling winnings, including lottery winnings
• Most withdrawals from an IRA or annuity

Nontaxable income includes the following:

• Money you contribute to certain types of retirement accounts
• Disability income on benefits you paid for with after-tax dollars
• Funds contributed to a Flexible Spending Account used for childcare or medical expenses through work
• Return of invested capital—that is, your money invested that is returned to you
• 401(k) money that's rolled over into another 401(k) or IRA when you change jobs
• Child support payments
• Money you've lent that is repaid