The federal income tax is perhaps the most abused, misunderstood and chaotic financial subject there is. Much of the problem can be traced to the use of terms that seem to mean one thing, but are treated as though they mean something else. Income is one such term. One would think anything you earn is income. While the IRS is happy to agree, it is important to realize there are some types of income that are not taxed. While this is good news, it can be a bit confusing.

Income related to the non-nuclear family is one area that can get confusing. If you receive child support payments from an ex-spouse, I have good news. They count as income, but are not taxed. You would think the same would be true for alimony, but it is not. If you receive alimony from an ex-spouse, it is income and taxed. In fact, your ex is supposed to issue you a 1099. Ah, the IRS has a funny sense of humor!

The number of lawsuits filed in this country is fairly staggering. If you are a plaintiff and win a lawsuit, you could be in for some surprising news. Any part of the judgment that is apportioned to compensatory damages, such as pain and suffering, is not taxed as income. Any part of the award, however, that is attributed to lost earnings because you missed work is considered income and taxed. In short, get hurt, but don't miss work!

Life insurance is another area where things get confusing. If you a relative dies and names you the beneficiary of a life insurance, the proceeds are not taxed as income. They may, however, be subject to the estate tax ? a subject for another article. On the other hand, if you have a life insurance policy and cash it out, you must pay taxes on any gain that exceeds the premiums you paid. This is why many people prefer to take loans against their policies. Loans are, of course, not taxable.

If you win a scholarship or grant to pay for your education, congratulations! It is not taxable as income with a couple of exceptions. If you use any of the money for room and board, you have a tax problem. Yep, you have to pay income tax on the amount paid for the room and board. Welcome to the world of tax!

When it comes to income tax, you would be surprised how many types of income are not actually taxable. Before you include all of your income on your 1040, it may be worth your time to figure out if any of it can be excluded from your adjusted gross income.