10 Tax Free Sources of Income

According to the IRS, all income is taxable unless they tell you that it isn’t. That’s a pretty good blanket to toss over everyone.  So, if you are wondering if income you received is taxable, assume that it is unless a financial advisor or tax pro tells you that it isn’t.

It turns out that there are a lot of income sources that are not taxable. Here is a short incomplete list of non-taxable income streams.

Municipal Bond Interest

This is still a nice income stream, particularly for individuals in high tax brackets.  For example, suppose that you are in the 28% tax bracket, and the muni is paying 6%.  When you take your tax bracket into account, your effective interest rate is 8.33% because the interest payment is tax free.

Life Insurance Proceeds

If you are the beneficiary of life insurance proceeds that are paid because someone has died, then the payment is generally income tax free. Since proceeds from life insurance may be subject to estate tax, I used the word generally.  However, in many cases a life insurance payment to the policy’s beneficiary is tax free.

Gifts

Wow, if someone gives you a $100,000 gift, you probably don’t have to pay taxes on it. However, the donor may have to pay gift tax. If he doesn’t pay the gift tax owed, the IRS may come after you for collection.   

Inheritance

Most items that you receive such as cash and property are not subject to income tax. Notable exceptions are retirement accounts.  

Social Security Income

In many, many cases social security income is non-taxable. However, it becomes taxable if your income from other sources is high.  The IRS uses something called modified adjusted gross income (MAGI) to determine if your benefits are taxable or not. If your filing status is married filing jointly, your benefits start become taxable if your MAGI exceeds $32,000, otherwise it’s $25,000.

Workers’ Compensation

 If you are receiving benefits under a workers’ compensation act or statute because you are sick or injured, then those payments are not taxable. Okay, good to know.

Veterans’ Benefits

If the Department of Veterans’ Affairs (VA) is making payments to you, then you don’t have to report those payments as income. This is a well-deserved tax break.

Disability Payments

If you paid the premiums for short or long-term disability insurance, then the received payments due to your disability are not subject to income tax and do not need to be included on your income tax return. However, if your employer pays part or the entire premium for the insurance, the benefit is taxable to the extent of your employer’s contribution.

Grants and Scholarships

These are generally tax free to the extent that they are used for qualified educational expenses. If the grant/scholarship you received is more than your qualified educational expenses are, then the excess is subject to income tax.    

Cash Rebates from a Dealer or Manufacturer

That big check you received as a rebate for buying a car is not taxable. But, the basis of your purchase must be lowered by the rebate amount.

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Income Tax Preparation in Austin Texas
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