According to the IRS, income is any money, property or services that taxpayers receive. All income is taxed unless it is specifically made untaxable by law. Though these exceptions are few and far between, they are still worth knowing about. Here are 10 sources of income that fall under the category of nontaxable income.
1. Disability Insurance Payments
Generally, disability benefits are taxable if they come from an insurance policy paid for by your employer, but there are many other types of disability benefits that are nontaxable. These include supplemental disability insurance through your employer purchased with after-tax dollars and worker’s compensation. As well as compensatory (but not punitive) damages for injury or sickness, permanent loss or partial loss of a bodily function and compensation for permanent disfiguration. Disability benefits from a public welfare fund are also nontaxable, as well as income from a no-fault car insurance policy.
2. Employer-Provided Insurance
The IRS says that “generally, the value of accident or health plan coverage provided to you by your employer is not included in your income.” This means that any health insurance you have through your employer supplied by a third party is nontaxable. Additionally, the applies to employee and employer contributions made to a health savings account.
3. Gift Giving of Up to $15,000
Money gifts are also taxable, but only under a certain amount. Tax is paid by the gift-giver, not the recipient. The annual threshold for cash gifts will be $15,000 in 2018. The following types of gifts are also considered nontaxable:
- Tuition and medical expenses paid on someone else’s behalf
- Political donations
- Gifts to charities
To prevent tax evasion, the IRS says that the gift tax applies “whether the donor intends the transfer to be a gift or not.”
4. Life Insurance Payouts
If a family member dies and leaves you a large life insurance benefit, you won’t need to pay tax on the income. However, there are some exceptions to this rule. For more information read IRS publication 525: Taxable and Nontaxable Income.
5. Sale of Principal Residence
Individuals and married couples who have owned their home and lived in it for at least two of the past 5 years are able to deduct $250,000 (for individuals) or $500,000 (for married couples filing jointly) of capital gains from the sale of their home.
6. Up to $3,000 of Income Offset by Capital Losses
If your investments are going badly, and you sell at a loss, you can reduce your taxable income by up to $3,000 per year. Capital losses can actually be carried over more than one year until the entire cost of the loss has been offset. For instance, if you sold investments at a loss of $5,000, in 2017 you could subtract $3,000 from your taxable income, and another $2,000 during 2018.
7. Earned Income in 7 States
As each state makes many of its own laws, there are 7 that have chosen not to have levied a state income tax on their residents. The seven states that this law applies to are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
8. Corporate Income Earned in 4 States
A handful of states encourage businesses to open their doors in their location by not taxing corporate income. These 4 states are Nevada, Ohio, Texas and Washington. Instead, the four stares impose gross receipts taxes.
As part of the new 2018 tax bill, the estate tax exemption has doubled. The individual exemption will rise to $11.2 million, with couples at $22.4 million. This break will last until 2026. If you are the beneficiary of an estate that falls into the exempt category, you will get 100% of your inheritance tax-free.
10. Municipal Bond Interest
Usually, when you invest in bonds, you need to pay a federal, state, or local tax on how much you earn. But, when you earn money from municipal bonds the proceeds are usually tax-free if you live in the same state that the bonds were issued. Typically, municipal bonds see a lower return than other bonds, but when you take their tax-free status into consideration you might feel the benefits.