The Government states that unless described so by law, all income from whatever source is taxable – however, there are some notable exceptions, commonly known as non-taxable income. This can sometimes seem like a minefield and many people find themselves confused and not sure where they stand. It can help to have a clear explanation of taxation matters and hopefully you’ll find this guide to the top ten sources of non-taxable income listed below easy to understand and useful:
1. Sale of the Main House You Live In
If a married couple decide to sell the house that they have lived in for more than two years and can prove they have owned it for longer than two, then they are entitled to exclude up to $500,000 (if married) and $250,000 (if single) from their capital gains tax once their home is sold. This one aspect and example of non-taxable income
2. Monies Earned In Nine Specific States
If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming these particular states have chosen not to levy state income tax on their residents, this means that these particular places are indirectly encouraging more people to go and live there as they’ll be able to keep more of their income without being taxed on it.
3. Corporate Income in Five Specific States
Following on from this, in Nevada, South Dakota, Texas, Washington and Wyoming corporations do not pay any tax on their corporate income, again, this is a sound way of getting businesses to relocate or start up in these areas, so that they will be able to keep a larger portion of their earnings.
4. Estate Tax
Anything up to $1million is non-taxable income and this seems to unfairly penalize anyone who is a beneficiary of someone who had a lot of money. Estate tax – also known as Death Tax is something that is always very much in flux and changes regularly. It has fluctuated a great deal since 2005. If you are a beneficiary of an estate that falls into the right category you will get the income tax free.
5. Municipal Bond Interest
When you earn money from Municipal Bonds, it is tax free providing you’re still living in the state they were issued in at the time. This is non-taxable income even if they were bought as part of a bond scheme or simply as individual stand-alone certificates.
6. Disability Insurance Payments
These are non-taxable income if they meet a certain level of criteria, which are as follows:
If it is worker’s compensation
If it is compensation for a disability or injury
If the disability benefit comes from a public welfare system
If you purchase private disability insurance with after-tax dollars
Disability benefits under a no fault car insurance policy for loss of income are non-taxable income.
7. Life Insurance Pay Outs
If a loved one dies and leaves you with a lot of money then you are not liable for any tax on this, however, there are some notable exceptions to the rule and you should always check the IRS Publication 525 for any changes or specific clauses that might affect you or your loved ones.
If you have been “given” a gift of monetary value up to $13,000 then you are not liable for tax on it. As an example, two parents with three children could gift each of their children $13,000 each – a total of $78,000. Each child would have $26,000 and none of it would be taxable.
Other monetary gifts that are not taxable are:
Political donations to any party at any time
Tuition fees or medical fees that have been paid on someone else’s behest.
Charitable donations to any good cause
9. Employer Provided Insurance
If you have something like this which has been provided by your employer or you pay into another such healthcare scheme then this is non-taxable too. Employer provided long term care is also not taxable.
10. $3000 of Income Offset By Capital Losses
If you have investments and sell them at a loss you can use this loss to reduce your taxable income by up to $3000 per year. Losses like this can be carried over year to year until the entire loss has been totally offset.
It seems odd that the government taxes what you earn at work but not your life insurance – many people find this notion strange, regardless of their political beliefs, however, that is the way things stand legally and it cannot be argued with. The government will encourage activities that it thinks will have some monetary benefit to the country and discourage others that they will believe will have a detrimental impact or one that will not benefit the nation as a whole.