In general, all kinds of income, including earned, found, or won is income for tax purposes (IRC Sec 61). Consequently, income is broadly defined with exclusions generally limited to those specified in the Internal Revenue Code.

However, there is a little-known administrative exception, called the general welfare exception (GWE), which allows some payments to be excluded from income. The IRS has consistently concluded that payments to individuals by government units, under legislatively provided social benefit programs, for the promotion of the general welfare, are not includible in a recipient’s income. The classic example of this type of payment is a government payment made to victims of a natural disaster. Other examples include Temporary Assistance for Needy Families (TANF) payments, food benefits received under the Nutrition Program for the Elderly and mortgage assistance payments under the National Housing Act.

To qualify payments must:

The payment must be made because of need, either an individual’s or a family’s. Payments to businesses generally do not qualify (Rev. Rul. 2005-46). Sometimes, the government authority looks to the recipient’s income level (presumably as a means of assessing need) or to individuals who fall below certain income thresholds.

The IRS’s determination of what makes up a needs-based payment varies, depending on what the payment is being made for. Typically, to be excluded, these payments must be to pay or reimburse expenses for essential items such as food, medical, housing or heating costs.

However, what any individual taxpayer “needs” is a subjective determination, and the IRS has applied the GWE to many different contexts, including education assistance, payments to facilitate adoption, certain economic development grants, and even payments to compensate crime victims. Note: Age, in and of itself, is not a demonstrated need