Taxpayers report various types of income on Schedule 1 (Additional Income). These items may require separate forms, depending on the source. Farm, business, and rental income are also reported on Schedule 1 but are covered in other sections.
Refund of State and Local Income Taxes
Taxpayers who itemize may deduct state and local taxes (SALT), subject to the annual SALT deduction limit.
A state tax refund is taxable only if the taxpayer received a tax benefit from deducting those taxes in the prior year.
A refund is not taxable when:
- The taxpayer did not itemize
- The taxpayer elected to deduct sales tax instead of income tax
- The SALT deduction was already capped, so the refund did not change the prior‑year deduction
This follows the tax benefit rule.
Alimony
Tax treatment depends on when the divorce or separation instrument was executed.
Post‑2018 Agreements
- Alimony not deductible by payor
- Alimony not income to recipient
- Treated like child support
Pre‑2019 Agreements
- Alimony deductible by payor
- Alimony taxable to recipient
If modified after 2018, the agreement follows:
- Old rules unless the modification opts in to TCJA treatment
- New rules if modification explicitly adopts TCJA treatment
Other Gains or Losses
Reported on Form 4797 when involving:
- Sale/exchange of business property
- Depreciation recapture
- Involuntary conversions
- Mark‑to‑market trader gains/losses
Some gains flow to Schedule D, others to Schedule 1 as “Other Gains.”
Unemployment Compensation
Unemployment benefits are taxable. Taxpayers receive Form 1099‑G showing the amount received.
Other Income Categories
Bartering Income
Bartering is taxable. Include the fair market value of property or services received.
Bribes and Kickbacks
Illegal payments such as bribes, kickbacks, or side commissions are taxable and reported as Other Income or on Schedule C if tied to self‑employment.
Canceled Debt
Canceled or forgiven debt is generally taxable unless excluded under:
- Bankruptcy
- Insolvency
- Price reduction
- Certain student loans
- Qualified principal residence debt
- Qualified farm or real property business debt
Gambling Winnings
All gambling winnings are taxable, including non‑cash prizes. Losses are deductible only up to winnings and only as itemized deductions.
Hobby Income
Hobby income is taxable and reported on Schedule 1.
Hobby expenses are not deductible.
Factors determining whether an activity is a business include:
- Businesslike operation
- Time and effort
- Dependence on income
- History of profits
- Expertise
- Changes to improve profitability
- Prior success in similar activities
- Asset appreciation potential
Presumption of profit motive: profit in 3 of 5 years (special rules for horses).
Illegal Activities
Income from illegal activities is taxable.
Jury Duty Pay
Jury pay is taxable. If turned over to an employer (because salary continued), the taxpayer may deduct the amount paid to the employer.
Rental of Personal Property
If renting personal property for profit but not as a business, report income on Schedule 1.
Court Awards and Damages
Taxable:
- Interest
- Lost wages/profits
- Punitive damages
- Pension rights (if taxpayer did not contribute)
- Business‑related damages
- Emotional distress damages (non‑physical)
- Attorney fees where recovery is taxable
Not taxable:
- Compensatory damages for physical injury or physical sickness
- Emotional distress directly tied to physical injury
Prizes and Awards
Prizes are taxable unless refused. Include fair market value of non‑cash awards.