Income and Assets · Income

Other income

This is the drawer the return keeps for receipts that fit nowhere else, and it rewards a single habit: assume inclusion, then look for the section that takes the item out. Most of the exclusions here are narrower than the word used to describe them. A “scholarship” is only excluded so far as it buys particular things; “damages” only where the injury was physical; a “prize” only in a case so specific that almost nobody meets it.

The rule

Scholarships are excluded by what they buy, not by what they are called. Gross income does not include any amount received as a qualified scholarship by a candidate for a degree at an educational organization described in § 170(b)(1)(A)(ii) (IRC § 117(a)), and an amount is a qualified scholarship only to the extent the individual establishes that, under the conditions of the grant, it was used for qualified tuition and related expenses (IRC § 117(b)(1)). Those are tuition and fees required for enrolment or attendance, and fees, books, supplies and equipment required for courses of instruction (IRC § 117(b)(2)(A), (B)). The burden of establishing the use sits on the individual.

The service portion is always in. Subsections (a) and (d) do not apply to that portion of any amount received which represents payment for teaching, research or other services by the student (IRC § 117(c)(1)) — with narrow exceptions for the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance program, and a comprehensive student work-learning-service program at a work college (IRC § 117(c)(2)(A)–(C)).

Barter is compensation at fair market value. If services are paid for in property, the fair market value of the property must be included as compensation; if services are exchanged for other services, the fair market value of those services must be included. Where the services are rendered at a stipulated price, that price is presumed to be fair market value absent evidence to the contrary (Reg. § 1.61-2(d)(1)). Both sides of a barter have income.

Prizes and awards are included, with two narrow escapes. Gross income includes amounts received as prizes and awards (IRC § 74(a)). The first exception requires all three of: selection without any action to enter, no requirement to render substantial future services, and transfer by the payor to a governmental unit or a § 170(c)(1) or (2) organisation on the recipient’s designation (IRC § 74(b)(1)–(3)). The second excludes the value of an employee achievement award within § 274(j), capped by that section’s deduction limits (IRC § 74(c)(1)).

Damages need a physical injury. Gross income does not include damages other than punitive received on account of personal physical injuries or physical sickness (IRC § 104(a)(2)), and the opening words of § 104(a) claw back amounts attributable to § 213 medical deductions allowed in a prior year. Workers’ compensation for personal injuries or sickness is separately excluded (IRC § 104(a)(1)).

Three items that surprise people. Unemployment compensation is expressly included in gross income (IRC § 85(a)). Qualified disaster relief payments are expressly excluded (IRC § 139(a)). And compensation for active service below commissioned officer grade for any month any part of which was served in a combat zone is excluded (IRC § 112(a)).

Alimony is gone for new instruments. IRC § 71, which included alimony in the recipient’s income, and IRC § 215, which allowed the payer a deduction, were both repealed by Pub. L. 115-97 § 11051, and former § 61(a)(8) was struck. For an instrument executed after 2018, neither side has anything to report; a pre-2019 instrument not modified to adopt the new rule keeps the old treatment on both sides.

Current figures

How it works in practice

Ask what the money was for and what it was traded against. Those two questions resolve most of this category, because the exclusions here are drawn by purpose rather than by source.

For a student, get the award letter and the bursar’s statement, not the client’s summary. The split between qualified expenses and living costs is arithmetic once you have both, and the § 117(c) service question is settled by whether the award is conditioned on teaching or research — a graduate stipend usually is, a merit scholarship usually is not, and one award can contain both.

For barter, the recurring error is treating a swap as though nothing happened. Both parties have income at the fair market value of what they received, and Reg. § 1.61-2(d)(1) supplies a presumption where the work was priced. Exchange networks issue information returns, but a two-party swap generates nothing, and the absence of a form is not the absence of income.

For a settlement, read the agreement before the cheque. The allocation between physical injury, emotional distress, lost wages and punitive damages decides the tax, and § 104(a)(2) reaches only damages on account of personal physical injuries or physical sickness. Interest on a judgment is separately includible whatever the underlying claim.

Two practical points that arise most years. Unemployment compensation is included, and it is often received without withholding, so a client who was out of work faces a balance due on top of a bad year. And where a client has excluded something in the past — a scholarship, a recovery — check whether the exclusion has any downstream effect: § 117 amounts reduce the expenses available for the education credits, and that coordination is easy to miss.

How this has changed

The alimony repeal is the change still doing damage, because it removed two sections rather than amending one. Pub. L. 115-97 § 11051(a) repealed IRC § 215, § 11051(b)(1)(B) repealed IRC § 71, and § 11051(b)(1)(A) struck former § 61(a)(8). A source that describes alimony as taxable to the recipient is describing a section that no longer exists, and the effective date turns on the instrument rather than the year — an instrument executed on or before 31 December 2018, and not modified to adopt the new rule, keeps the old treatment indefinitely. So both regimes are live in 2026 and the question is always about the document.

The § 74 and § 117 architecture is old and unmoved. What has changed around them is the coordination: the education credits now require a social security number under IRC § 25A(g)(1), and § 117 amounts still reduce the expenses available for those credits, so a scholarship that produces no income of its own can still change the credit computation.

Two figures in this topic are worth watching for the opposite reason — they do not move. The employee achievement award limits in IRC § 274(j)(2) are statutory and unindexed, and have stood at the same amounts for decades. A source giving them without a year is right; a source giving them as though they were adjusted annually is confusing them with the fringe benefit figures that are.

Exam focus

Expect a scholarship computation. Take the award, subtract qualified tuition and related expenses within § 117(b)(2), and include the rest — then check separately whether any part is payment for services under § 117(c), because that part is included regardless of what it was spent on.

Know that both sides of a barter have income at fair market value, and that a stipulated price is presumed to be that value.

Know the § 104(a)(2) requirement is a physical injury, and that punitive damages are excluded from the exclusion.

Know the three conditions in § 74(b) and, in particular, that the transfer must be made by the payor. And know that alimony repeal took both the inclusion and the deduction, with the instrument date governing.

Check yourself

1. A degree candidate receives a $20,000 scholarship, spending $14,000 on tuition, $1,200 on books required for her courses, and $4,800 on rent. How much is includible?

Answer: $4,800. IRC § 117(b)(2) limits qualified tuition and related expenses to tuition and fees required for enrolment and to fees, books, supplies and equipment required for courses of instruction. The tuition and the required books qualify; rent is not a qualified expense however necessary it is to attending.

2. A graduate student receives $12,000 conditioned on serving as a research assistant, and spends all of it on tuition. Is it excluded?

Answer: no. IRC § 117(c)(1) provides that the exclusion does not apply to that portion of any amount received which represents payment for teaching, research or other services by the student. Spending it on tuition is irrelevant — the service condition removes it from the exclusion before the qualified-expense test is reached, and none of the three § 117(c)(2) exceptions covers a university assistantship.

3. A photographer and a caterer swap services, each valuing their own work at $1,500. What is reportable?

Answer: each includes $1,500 as compensation. Reg. § 1.61-2(d)(1) provides that where services are paid for in exchange for other services, the fair market value of the services taken in payment must be included in income, and a stipulated price is presumed to be fair market value absent evidence to the contrary. Each may also have a business deduction for the services received, but the income arises on both sides and no information return will report it.

4. A taxpayer wins a $25,000 award for civic achievement, having been nominated by others, and donates it to a qualifying charity a week after receiving it. Is it excluded under IRC § 74(b)?

Answer: no. IRC § 74(b)(3) requires the prize to be transferred by the payor to a governmental unit or a § 170(c)(1) or (2) organisation pursuant to a designation made by the recipient. Receiving the money and then donating it fails that condition, however quickly it is done. The award is included in gross income under § 74(a), and the donation is a charitable contribution deduction subject to its own limits.