Other Taxable Income (2025)

Alimony

Post-2018 divorces (TCJA): Alimony is NOT deductible by payer, NOT taxable to recipient. Payments treated as neither income nor deduction.

Pre-2019 divorces (grandfathered): Old rules apply — payer deducts, recipient reports as income. If pre-2019 decree is later modified to apply new rules, new treatment applies.

Key test for pre-2019 alimony:

• Must be in cash (or check/money order)
• Payments must be under written divorce/separation agreement
• Spouses must not live in same household
• Payment obligation must END at recipient's death
• Cannot be designated as non-alimony payment

NOT alimony: Child support (never deductible, never taxable), property settlements, non-cash payments.

Child contingency rule: If payments decrease when a child reaches a certain age, graduates, marries, etc. → that portion is treated as child support (not alimony).

Partial payments: If agreement covers both child support AND alimony, partial payments first apply to child support obligation, then remainder is alimony.

Social Security Benefits

Reported on Form SSA-1099. Maximum 85% of benefits taxable. Taxability depends on "combined income" (MAGI + ½ Social Security + tax-exempt interest):

MFJ spouses must combine income and benefits even if only one received benefits.

Unemployment Compensation

Fully taxable. Reported on Schedule 1, Line 7. Includes state unemployment, railroad unemployment, and any union-paid unemployment benefits. Includes amounts withheld for taxes.

Gambling Income & Losses

Winnings: Fully taxable. Reported on Schedule 1, Line 8b. Form W-2G issued for certain winnings. Must report ALL winnings even without W-2G. Fantasy sports winnings = gambling.

Losses: Deductible on Schedule A (itemized) but ONLY up to the amount of winnings. Cannot create a net loss. Must keep detailed diary/log of sessions.

Professional gamblers (2018-2025): Under TCJA, ALL gambling expenses (travel, etc.) limited to winnings — can't create Schedule C loss.

2026 change (OBBBA): Gambling loss deduction reduced to 90% of losses (still capped at winnings). But for 2025 exam: 100% of losses up to winnings.

Taxable Recoveries (State Tax Refunds)

State/local tax refunds are taxable ONLY if the taxpayer itemized in the prior year AND received a tax benefit. If standard deduction was taken, refund is not taxable.

Reported on Schedule 1, Line 1. Form 1099-G issued by state.

Federal income tax refunds: NEVER taxable.

Claim of Right / Repayment (§1341)

If taxpayer must repay an amount >$3,000 that was included in income in a prior year:

• > $3,000 repayment: May take a tax credit on Schedule 3 (Form 1040) = the tax change from including the income in the prior year (generally the better result), OR deduct the repayment (whichever is better)
• ≤ $3,000 repayment: No §1341; deduct on the same form/schedule where the income was originally reported (e.g., Schedule C for a business repayment). Cannot amend the prior year.

Hobby Income

A hobby is an activity for enjoyment/recreation, not for profit. Hobby income IS taxable (Schedule 1, Line 8j). Key rules:

• Hobby expenses are NOT deductible (TCJA suspended misc. itemized deductions 2018-2025)
• COGS (cost of goods sold) MAY still be used to reduce gross hobby income → taxable net income
• Hobby income is NOT subject to self-employment tax (a benefit vs. a business)
• Losses from a hobby cannot offset other income
• §183(d) safe harbor: An activity is presumed to be for-profit if it shows a profit in 3 of 5 consecutive years (2 of 7 years for horse breeding/racing)

Jury Duty Pay

Taxable. Report on Schedule 1, Line 8h. If employer continues salary AND taxpayer turns jury pay over to employer, taxpayer deducts the turned-over amount as an adjustment to income.

Prizes & Awards

Taxable at FMV. Exceptions: employee achievement awards (length of service/safety) under $1,600 (qualified plan) / $400 (non-qualified), certain scholarship prizes, and awards donated directly to charity (if taxpayer never took possession). Recipient can avoid tax by refusing the prize.

Court Awards & Settlements

• Physical injury/sickness damages: EXCLUDED (§104(a)(2))
• Punitive damages: ALWAYS taxable (even in physical injury cases)
• Emotional distress: Taxable (unless due to physical injury/sickness; medical-care costs for emotional distress are excludable)
• Lost wages/salary: Taxable
• Interest on awards: Taxable
• Wrongful imprisonment: Civil damages/restitution/monetary awards for wrongful imprisonment are NOT taxable
• Sexual harassment/abuse under NDA: Attorney fees are NOT deductible if payment was subject to a confidentiality (non-disclosure) agreement

Cancellation of Debt (COD)

See dedicated wiki pages for full COD cluster (QPRI, insolvency, bankruptcy, §108(h)(4), attribute reduction).

Government Benefits

Other Miscellaneous Taxable Income (Schedule 1)

Union strike benefits, Alaska Permanent Fund dividend, executor fees (Schedule 1 "other income" if not in the business of being executor; Schedule C if in the business), tips/gifts received at parties/sales events as host.

Cancellation of Debt — Qualified Principal Residence Indebtedness (QPRI)

Rule

A taxpayer may exclude from gross income the discharge of qualified principal residence indebtedness (QPRI) up to $750,000 ($375,000 for MFS), provided the discharge occurs before January 1, 2026 and is directly related to a decline in the home's value or the taxpayer's financial condition. The excluded amount reduces the taxpayer's basis in the principal residence (but not below zero).

For discharges after December 31, 2025, QPRI exclusion expires — absent further Congressional extension, COD becomes fully taxable unless another §108 exclusion applies (insolvency, bankruptcy, etc.).

What Makes Debt "QPRI"? — The Three Tests

A forgiven debt qualifies as QPRI only if it passes all three tests at the time it was borrowed:

Test 1: Must Be "Acquisition Indebtedness"

The money must have been used to buy, build, or substantially improve the home. This is the same definition as §163(h)(3)(B) — the mortgage interest deduction definition.

Passes (QPRI):

• Original mortgage taken out to buy the house
• Construction loan to build the house
• Loan to add a room, renovate the kitchen, put on a new roof

Fails (not QPRI):

• Cash-out refinance where the cash bought a car or paid credit cards
• Home equity loan used for a vacation
• Any debt where the money was NOT spent on the house itself

Test 2: Must Be Secured by the Residence

The home must be the collateral. If you don't pay, the lender can take the house.

Passes (QPRI):

• A mortgage or deed of trust recorded against the property

Fails (not QPRI):

• Unsecured personal loan (even if you SAY you'll use it for the house)
• Credit card debt (even if you charged home improvement supplies on it)
• A loan secured by a different property (e.g., your rental building)

Test 3: Must Be Your Principal Residence

Not a vacation home. Not a rental. Not an investment property. The place where you actually live most of the time.

Passes (QPRI):

• The house where you sleep, get mail, and are registered to vote

Fails (not QPRI):

• A beach house you visit twice a year
• A rental property you own but don't live in
• A second home (even if you spend weekends there)

The Refinance Problem — Most Common Trap

When someone refinances a mortgage, the QPRI status gets split into two buckets:

Original mortgage:        $150,000  (used to buy house)  →  QPRI ✓
New refinance loan:       $200,000

  Bucket 1: $150,000  →  same acquisition debt, just refinanced  →  QPRI ✓
  Bucket 2: $50,000   →  cash taken out at refi                     →  QPRI ✗ (unless used to improve home)

The §108(h)(4) ordering rule — NOT proportional:

Per IRC §108(h)(4) and Form 982 instructions, when a split loan is discharged, the non-QPRI portion is deemed discharged first. QPRI only covers the excess, if any.

QPRI exclusion = max(0, amount discharged − non-QPRI portion of loan)
(capped at the QPRI portion of the loan)

Example — IRS Form 982 instructions:

• Total loan: $1,000,000 (QPRI: $800,000, non-QPRI: $200,000)
• Home sold for $700,000, $300,000 discharged
• QPRI exclusion: $300,000 − $200,000 = $100,000
• Remaining $200,000 is non-QPRI → may qualify for insolvency or other exclusions

Example — Jane: Jane's refi loan: $320,000 (QPRI: $250,000, non-QPRI: $70,000). Lender forgives $40,000.

Non-QPRI portion: $70,000 → this gets discharged first
$40,000 discharged − $70,000 non-QPRI = -$30,000 → $0 QPRI

Jane gets ZERO QPRI exclusion. The entire $40,000 is treated as non-QPRI COD. She must rely on insolvency or bankruptcy (if eligible) or it's fully taxable. This is the trap — a seemingly large QPRI portion means nothing if the discharged amount doesn't exceed the non-QPRI portion.

The $750,000 Cap

QPRI only covers the first $750,000 of acquisition debt ($375,000 for married filing separately). This is the same cap used for the mortgage interest deduction. Amounts over the cap are treated as non-QPRI debt — and per §108(h)(4), non-QPRI is discharged FIRST.

Example: Tom has a $900,000 mortgage on his primary home (all acquisition debt — he bought an expensive house). The lender forgives $100,000.

QPRI-eligible: $750,000
Over-cap (non-QPRI): $150,000
§108(h)(4): non-QPRI discharged first
$100,000 discharged − $150,000 non-QPRI = -$50,000 → ZERO QPRI

Tom gets ZERO QPRI exclusion. All $100,000 is non-QPRI COD — fully taxable unless insolvency or bankruptcy applies. The cap doesn't just limit QPRI proportionally — it can eliminate it entirely if the discharge is smaller than the over-cap portion.

This is devastating: a taxpayer with a $900k acquisition loan who gets $100k forgiven might assume QPRI covers most of it. The §108(h)(4) ordering says otherwise.

Authority

• IRC §108(a)(1)(E) — Qualified principal residence indebtedness exclusion
• IRC §108(h) — Defines QPRI as acquisition indebtedness (IRC §163(h)(3)(B)) incurred to acquire, construct, or substantially improve a qualified residence, secured by that residence
• IRC §108(h)(2) — $750,000 limitation ($375,000 MFS)
• IRC §108(a)(2)(C) — QPRI takes precedence over insolvency by default; taxpayer must elect to use insolvency instead
• IRC §108(h)(4) — Ordering rule for split loans: non-QPRI portion is discharged FIRST. QPRI covers only the excess. NOT proportional. See §108(h)(4) section below.
• Pub 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
• Form 982 — Reduction of Tax Attributes Due to Discharge of Indebtedness
• Consolidated Appropriations Act, 2021 (P.L. 116-260) — Extended QPRI exclusion through December 31, 2025
• Form 1099-C — Cancellation of Debt (issued by lender)

Edge Cases

• Discharge after 12/31/2025: Fully taxable unless Congress extends. Watch for year-end workouts — date of identifiable event on 1099-C controls.
• Short sale / foreclosure: QPRI exclusion available if criteria met; same basis reduction rule applies.
• Recourse vs. non-recourse: QPRI applies to both. For non-recourse, sale price may create COD separate from the QPRI analysis — COD equals debt discharged minus FMV.
• Ordering with insolvency (§108(a)(2)(C)): QPRI takes precedence by default. If the taxpayer has both QPRI and insolvency available, QPRI applies automatically and insolvency does not — the taxpayer must elect on the return to use insolvency instead (and would almost never do so, since insolvency burns NOLs and credits while QPRI only reduces home basis). The election only makes sense if home basis is zero (can't reduce below zero).
• Second home / vacation home: The exclusion applies to the taxpayer's principal residence only.
• Home improvement with credit card: If you charge a new roof to a credit card, the ROOF qualifies as an improvement, but the debt is NOT QPRI because a credit card is not secured by the residence. Fails Test 2.

Common Traps

• Basis reduction overlooked: Failing to file Form 982 and reduce home basis. When the home is later sold, the reduced basis increases gain (or reduces loss). This can trigger surprise taxable gain.
• Thinking QPRI is permanent: The exclusion expires 12/31/2025. Many candidates assume it's a permanent code provision — it is not. Check the discharge date.
• Confusing recourse/non-recourse COD: For a non-recourse loan, cancellation may be treated as sale proceeds (Reg §1.1001-2), not COD. But if the lender forgives a deficiency after foreclosure on a recourse loan, that IS COD.
• Form 1099-C is not conclusive: The amount on 1099-C may be wrong. The taxpayer reports the correct amount and explains any discrepancy.
• Forgetting the $750k/$375k MFS limit: MFS filers get half the exclusion. If both spouses on the mortgage, only $375k of discharged QPRI is excluded on a MFS return.
• Home office complication: If part of the home was depreciated, the QPRI exclusion does not apply to that portion of discharged debt — it's treated as business COD.
• QPRI vs. insolvency election trap: §108(a)(2)(C) makes QPRI the default. A taxpayer who checks the wrong box on Form 982 (electing insolvency when they meant QPRI) would inadvertently trigger full §108(b) attribute reduction — burning NOLs, credits, and other tax assets unnecessarily. Make sure Line 2 (QPRI) is checked, not Line 1b (insolvency), when QPRI is the better option.
• §108(h)(4) split-loan trap — the "proportional assumption": Many assume QPRI applies proportionally to a refinanced loan. WRONG. Per §108(h)(4) and the Form 982 instructions, the non-QPRI portion is deemed discharged FIRST. If the discharged amount doesn't exceed the non-QPRI portion, QPRI provides ZERO exclusion. Example: $320k loan ($250k QPRI, $70k cash-out), $40k discharged → $40k < $70k → ZERO QPRI. All $40k is non-QPRI COD. This is the most dangerous trap in the entire COD framework for exam purposes.

QPRI Takes Precedence Over Insolvency (§108(a)(2)(C))

When a taxpayer qualifies for BOTH QPRI and insolvency exclusion on the same debt, QPRI wins by default. Insolvency does not apply. The taxpayer must affirmatively elect to use insolvency instead, on the tax return.

Why would anyone elect insolvency over QPRI? Almost never. The only scenario: the home's basis is already at or near zero, so QPRI can't reduce it further, while insolvency could still provide exclusion (at the cost of burning attributes). Otherwise, QPRI is strictly better — it only reduces home basis instead of burning NOLs, credits, and other tax assets.

Example — Raj with election:

• $180k COD, $135k QPRI portion, $70k insolvent, $40k NOL
• Default (no election): QPRI covers $135k. $70k insolvency NOT used. NOL safe. $45k non-QPRI taxable.
• If Raj elects insolvency: $70k insolvency used, NOL + credits burned, QPRI covers remainder. Worse outcome.

Bottom line: the taxpayer chooses. QPRI is the default. Electing insolvency is a trap door you open voluntarily — not something thrust upon you.

Connected Rules

• COD General Rule §61(a)(12) — Gross income includes discharge of indebtedness
• Insolvency Exclusion §108(a)(1)(B) — COD exclusion to extent of insolvency
• Bankruptcy Exclusion §108(a)(1)(A) — COD exclusion for Title 11 cases
• COD Attribute Reduction Ordering — §108(b) reduction sequence (NOL → general business credit → minimum tax credit → capital loss → basis → passive activity loss → foreign tax credit)
• Principal Residence Gain Exclusion §121 — Interacts with basis; reduced basis from QPRI means more gain on sale
• Filing Status — MFS Limitations — MFS halves the QPRI limit
• Recourse vs. Non-Recourse Debt — Treatment difference for COD vs. sale proceeds

Scenarios Worked

• Harold mortgage workout (2025): $20k QPRI discharge, not insolvent, recourse loan → excluded via Form 982, basis reduced by $20k (pure QPRI loan, no refinance, under $750k cap)
• Raj (QPRI + insolvency, no election): $180k COD. $750k/$1M cap → $750k QPRI-eligible, $250k non-QPRI. §108(h)(4): non-QPRI discharged first. $180k < $250k → ZERO QPRI. Raj must use insolvency ($70k) — NOL burns. $110k taxable. (note: this over-cap scenario is even worse than our earlier calculation)
• Jane refinance trap: $40k COD on $320k split loan ($250k QPRI / $70k cash-out). §108(h)(4): $40k < $70k → ZERO QPRI. All $40k non-QPRI, fully taxable unless other exclusion applies.
• Maria insolvency-only: $35k COD on split loan ($300k QPRI / $50k non-QPRI). §108(h)(4): $35k < $50k → ZERO QPRI. Must rely on insolvency ($12k). NOL burns. $23k taxable.