Most people understand that income taxes are a necessary price to pay to live in a country with national defense, a social safety net, transportation infrastructure, and public education. Yet those who write the tax code recognize that some revenue should be allowed to accumulate uninhibited. Thus, some earnings are tax-free income, so here our professional team from Lewis.cpa gives the answer to your question, what income isn't taxable?
Sources of Taxable Income in 2022
How much income tax the government can claim depends on what you made in 2021 and what your filing status is. The sources of that income, nevertheless, remain constant:
- Employee compensation - wages, salaries, tips, commissions, etc.
- Fringe benefits - awarded in connection with the work performed
- Business and investment income
- Partnership income
- Virtual currencies
- Bartering - what is received must possess a financial value
What Is Untaxable Income?
What does non-taxable income mean? These are earnings or received assets that are not included in taxable income. So, what does non-taxable income mean? This refers to revenue that is legally exempt from taxation.
What Is Considered Non-Taxable Income?
What qualifies as non-taxable income includes inheritances, gifts, and bequests; healthcare benefits; alimony and child support payments; welfare disbursements; and reimbursement monies relative to adoptions. Other examples of nontaxable income include payouts to a beneficiary of a life insurance policy that is non-taxable as are certain scholarship grants.
Accelerated Death Benefits
Death benefits from a life insurance policy are not to be reported as gross income. However, interest gained by these assets may sometimes be taxable. Accelerated benefits for the terminally ill are also tax-exempt.
The non-custodial parent who is under court order to pay child support must pay tax on the funds conveyed. Received child support is exempt from taxation.
Disaster Relief Assistance
According to the Federal Emergency Management Administration (FEMA), grants given in the wake of a natural or man-made disaster are not taxable by the Internal Revenue Service (IRS).
Up to a certain threshold, an employer can assist a worker with expenses related to adopting a child. Likewise, the employer can provide a certain amount of tuition assistance before it becomes subject to IRS levy.
Employer-Provided Accident and Health Plans
Any premiums paid by an employer for medical insurance are shielded from federal taxation. In the same way, worker compensation related to on-site accidents and mishaps is also non-taxable income.
Employer-Provided Group Term Life Insurance
The payments for any group term life insurance plan for an employee and/or spouse are exempt from taxation as long as the coverage face amount is not over $2,000.
Energy Conservation Subsidies
The U.S. government encourages the use of renewable fuels and alternative energy sources. In so doing, it offers incentives in the form of tax credits for those who employ solar panels, wind turbines, and other green infrastructure. As credits, they reduce the overall taxable income.
Foster Care Payments
Those acting as foster parents are performing a public service and the compensation they receive is directed toward the provision and raising of children. Therefore, the IRS does not count such payments as taxable income.
Per the IRS, a gift is a transfer of an asset where the receiver does not pay -- or does not pay in full. In general, the giver of a financial gift has already paid taxes on the money, unless the gift is a charitable contribution, so the recipient is not on the hook. However, there are very particular scenarios in which the recipient will pay tax on a gift. Should the gift be something other than financial, the IRS applies a fair market value, i.e. the price of the object if sold rather than gifted, to the exchange.
Illness or Injury Benefits
When misfortune affects a taxpayer or dependent, there is disability insurance to pay the bills while the sick or injured are unable to perform their work. Disability payments may or may not be taxable. The question often turns on whether the taxpayer is claiming the Earned Income Tax Credit or not. In addition, retirement status is a factor in this determination.
In brief, the financial value of inherited assets at the time of the bequest is not subject to federal taxation. However, interest earned - or appreciation gained - in the ensuing tax years is fair game as taxable income.
Interest in Municipal Bonds
Municipal bonds are secured debts issued by local and state governments in the interest of completing capital projects on roads, bridges, and public institutions. They are conservative investments in that they are safer and pay modestly. For those who live in the state where a bond is issued, the yields they receive are protected from taxation.
Life Insurance Death Benefit
As noted above, death benefits in and of themselves are not included as gross income and are therefore not taxable. Interest earned on them may be taxed by the IRS.
Principal Residence Proceeds
Proceeds from selling real estate, whether a primary residence, second home, or investment property, is considered a capital gain by the IRS and thus taxable income. However, the rate of taxation is contingent on overall income and may, in some cases, be zero percent.
Roth IRA Income
In contrast with traditional individual retirement accounts (IRAs), Roth IRA contributions are taxable; disbursements, on the other hand, remain tax-free.
Income That Falls into a Gray Area
The U.S. tax code is often difficult to decipher, and chock full of exceptions, qualifications, and formulas. Some forms of income are not readily classified as taxable or non-taxable until the whole return is evaluated.
The circumstances of the case and the legal basis for the settlement will drive whether income derived from a successful negotiation is taxable.
By itself, social security income is not taxed. However, when the total income of a recipient falls within a specified range, then that benefit is partially taxed.
Home Sale Proceeds
Per the above section on primary residences, revenue from home sales are open to IRS capital gains levies. Yet, if income is low enough, the tax rate is zero percent.
How to Reduce Tax Liability
You can have some say over how much income is non-taxable. Unlike Roth IRAs, traditional IRAs protect contributions from taxation. Making higher contributions in a given year shields those funds from the taxable income dragon. Meanwhile, investments unrelated to retirement should be those that are eligible for long-term rates. Just remember not to sell them until at least a year has passed. Discover the most important financial services your business needs and what we can offer today!
With rules as complex - some say convoluted - as those governing taxation in the U.S.s, even seemingly easy decisions come with a shadow of a doubt. Employing a certified public accountant Lewis.cpa well-grounded in the tax code provides not only peace of mind, but also confidence that your return is a reliable representation of your financial realities. Contact us today to discuss how we can partner with you to submit a return that answers every question.