IRS (Internal Revenue Service) tax is implied on just about everything. Taxable income may be defined as the gross income (every income from any source derived) minus deductions. That’s a vast territory that not only covers your income from wages but also unearned income from your investments. Even if there is something got on a cash-free basis, the value of the item you get as barter exchange will be taxable. In a nutshell, whether from your employer, prize winning, freelancing or even gambling jackpots, you must include your income to Uncle Sam’s tax roll.
In spite of that, there are some forms of income that the tax collectors won’t reel in and following includes some of them.
1. Adoption aid from employer – If your employer helps you bear the expense of adopting a child, the amount would go tax-free. As of 2016, an employer adoption-assistance benefit is 13,460 USD per child and increases to 13,570 USD for 2017.
2. Educational help from employer – Your income up to 5,250 USD as qualified employer funded educational assistance is non-taxable.
3. Worker’s compensation – If you get any financial benefit for any sort of workplace-related injury or illness under the state or federal compensation law, it would go tax-exempt.
4. Payment for children care – Child support payments made to divorced parents are non-taxable. Similarly, government-funded benefits given to foster parents for taking care of their children formally placed at their homes are usually tax-free.
5. Energy conservation subsidy – If you’ve upgraded air-conditioning system of your home and got rewarded with a rebate from your electricity service provider for the energy saving efforts, the rebated amount is tax-free. A financial reward from public utility department in the form of a direct or indirect subsidy for installation or purchase of any home energy saving device goes tax-exempt.
6. Carpooling – If you collect money from your community associates as you drive them to and from their workplace, that money will go tax-free. However, don’t charge so much that the service becomes a profit-generating business and so a taxable enterprise.
7. Life insurance proceeds – Life insurance proceeds you get as a beneficiary on the event of death of an insured person aren’t considered as a gross income and so it is tax-free. However, the interest you get on that amount is taxable.
8. Gift – Any financial gift, either in the form of asset or money, you receive is tax-free. The federal gift tax owed on the gift is the responsibility of the giver, who owes tax.
9. Municipal bond income – Interest earned on local or state government obligations are usually non-taxable. It would be even better, if you purchase a mini bond issued by your respective state, for example, Florida, the earnings from that bond are generally tax-free at Florida state level. You may ask your income tax consultant Florida for more details.
10. Inheritance – There is no such federal inheritance tax and thus whatever your ancestor left for you, poses no immediate tax. But if the asset, like a dividend-paying stock, your ancestor left produces income you might owe tax on that income.
However, whether an amount is tax-free or not is a bit tricky. A specific type of payment may be non-taxable while another, almost similar to that, may lead to a tax bill. Here are some instances where you must take special care.
- Social Security is usually non-taxable, provided it’s your only source of income. But if you have some other resources too, like from a taxable pension, a part-time job or investment income, you may owe federal tax at standard income tax rate on your federal government retirement benefits (up to 85 percent).
- While some legal settlements are taxable, others aren’t. To know if you owe tax on that settlement, consider what the settlement replaces and why it was granted. Proceeds for mental anguish or emotional distress owing to a personal physical injury or physical condition are generally non-taxable. But court-awarded punitive damages are always taxable, even if it was connected to a settlement for personal physical sickness or injury.
- Home-sale proceeds are usually tax-exempt as long as the profit is at or below a specific threshold – the threshold amount is 250,000 USD for a single home seller while it is 500,000 USD for a married couple who files their joint return. But tax will be collected on any amount beyond the threshold amount. However, that tax is owed at a usually lower long-term capital gain tax rate.
So as you receive money you think is non-taxable, check it with your tax specialist in Florida (if you’re a resident of Florida). You may find all the details regarding taxable and non-taxable income on IRS Publication 525.