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Technically speaking, everybody with an income has to pay taxes on their income, and filing your tax return is the perfect moment to acknowledge it. But not all income is taxable income.
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Income is defined as “the sum of all the wages, salaries, profits, interest payments, rents and other forms of earnings received in a given period of time.” The IRS specifies that gross income means all income from whatever source derived, which can be received in the form of money, property, or services, and is taxable unless it is specifically exempted by law.
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Yes, that is correct! What would a rule be without exceptions, right? Well, maybe not quite right, since the rule explicitly says that all income is taxable unless the law excludes it.
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- The basic income tax structure allows individuals to earn a certain amount of non-taxable income. This is generally calculated by the standard deduction amount listed on the federal and state tax forms.
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Some kinds of income are not taxable either because that income is considered as incentive or supported by the government, it was already taxed at origins, or just falls below a certain taxable level.
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Here are some types of income that the law usually allows you to exclude from your taxable income:
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- Life insurance proceeds. Proceeds paid to you because of the death of the insured person are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that you get that is more than the cost of the policy is taxable.
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- IRA and Pension rollovers. A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan. This rollover transaction is not taxable but it is reportable on your federal tax return.
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- Child support payments. The parent who pays child support cannot take a deduction for child support payments; therefore, the person who receives child support payments does not need to include these payments as income for tax purposes.
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- Inheritances. If the value of an estate with combined gross assets and prior taxable gifts does not exceed $5,340,000 in 2014 and $5,430,000 in 2015, the estate is exempt from taxes.
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- Gifts. For both 2014 and 2015 you can give $14,000 to each person and to as many individuals as you want, without triggering the gift tax.
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- Workers Compensation. Workers compensation benefits are tax-free unless you also receive Social Security disability benefits. If you're getting Social Security disability, there is one situation where part of your workers' compensation benefits may be taxed: if your disability benefits have been offset by your workers' comp benefits.
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- Disability payments, if you paid the premiums on the policy. If your employer paid the policy, then the disability payments are taxable. If you paid part of the policy, then part of the disability payments are non-taxable.
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- Court damages for personal physical injuries or physical sickness. If you have been issued financial awards because of a personal injury suit, you might not have to pay taxes on the money awarded.
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- Health and accident benefits. The existing federal income tax law regarding employer contributions or premium payments for plans on health, hospitalization, and accidents covering the employee, employee spouse, dependents, and children up to age 27, are not taxable.
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- Federal income tax refund. Also your state income tax refund if you took the Standard Deduction on the related prior year's 1040.
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- Qualified scholarships. In most cases, income from this type of scholarship is not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. On the other hand, amounts you use for room and board are taxable.
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- Foreign earned income. There is an exclusion for your foreign earned income which is adjusted annually for inflation. The exclusion is of $99,200 for 2014 and $100,800 for 2015.
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- Foster care payments. The tax law allows individuals who receive foster care payments to exclude them from gross income if payments are made pursuant to a foster care program of a State; if payments are paid by a State or political subdivision thereof, or a qualified agency; and if payments are paid to a foster care provider for the care of a qualified foster individual in the foster care provider’s home.
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- Social security benefits may not be taxable. It's a complicated calculation, but basically your social security benefits are not taxable if your adjusted gross income plus tax-exempt interest and 50% of your social security benefits is less than $32,000 (married filing jointly) or $25,000 (single or head of household).
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- Gain on the sale of your personal residence is usually nontaxable. The gain might be taxable if you lived in the residence less than two years or if the residence has ever been used as a rental property or home office.
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- Roth IRA qualified distributions are tax free.
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- Cancellation of debt because of bankruptcy or insolvency. If you receive a Form 1099-C with cancellation of debt income, that income isn't taxable to you if the debt was discharged when you declared bankruptcy or if you were insolvent at the time the debt was discharged. Insolvency is when your liabilities exceed your assets at the time of the debt cancellation.
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- Veterans Administration disability benefits. Disability Compensation is a tax free monetary benefit paid to Veterans with disabilities that are the result of a disease or injury incurred or aggravated during active military service. Compensation may also be paid for post-service disabilities that are considered related or secondary to disabilities occurring in service and for disabilities presumed to be related to circumstances of military service, even though they may arise after service. Generally, the degrees of disability specified are also designed to compensate for considerable loss of working time from exacerbations or illnesses.
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- Cash rebates. A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.
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- Reimbursements for qualified adoption expenses. Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion for employer-provided adoption assistance. The credit and exclusion are each subject to an income limitation and a dollar limitation.
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- Municipal Bonds interest. When you earn money from municipal bonds, the proceeds are usually tax-free at the federal level and also tax-free at the state level if you live in the same state the bonds were issued in. This tax exemption applies whether you invest in individual municipal bonds or purchase them through a municipal bond fund.
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| There are, of course, sources of nontaxable income which are not listed here, and there may be certain rules that apply to your particular situation. This is one more reason to urge you to look for professional help when dealing with the IRS and taxes to make sure you’re not paying more than you should on taxes. |
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