When most people hear the word “income” the next thing they think about is how much tax are they going to have to pay on the income.While it’s true that most income is taxable, whether it is being earned or as a return on investments, not all income is taxable.The following items are some of the most common forms of nontaxable income:

Child Support

When a couple gets a divorce, the judge might decree that one of the parties pay the other child support for the parent that gains custody of the child.  The IRS has deemed that child support is not taxable income, nor can it be used as a tax deduction.

Combat Pay

A person assigned to or deployed to a combat zone receives combat pay (officially known as imminent danger pay).Spending one day in a combat zone qualifies your pay for the entire month as combat pay.

Court Awards and Damages

Some court awarded income is considered taxable while others are considered nontaxable.  Taxable court awards include lost pay, punitive damages, business damages, among others.  The nontaxable court awards are limited to damages received for physical injury, sickness and emotional distress.

Disability Benefits

If your employer pays the premiums for the disability benefits then they would be taxable.  On the other hand, there are multiple instances of when disability benefits are nontaxable:

  1. Purchasing supplemental disability through your employer with after-tax dollars
  2. Purchasing a private disability insurance on your own with after-tax dollars
  3. Workers Compensation
  4. Benefits from a public welfare fund/governmental service
  5. A no-fault car insurance policy for loss of income

Gain on the sale of Personal Residence

When you sell your personal residence, you get to exclude income up to $250,000 for single taxpayers and $500,000 for married couples.  Be careful though, you must meet the ownership and use tests in order to qualify for the exclusion.

Gifts Received

The IRS technically defines all gifts as taxable, except for those specifically excluded by law.  Fortunately, most of the common gifts we all know and talk about fall under those being specifically excluded by law.  The most common being gifting up to a certain amount of money to individuals per year.  This figure has increased to $15,000 as of 2018.  A gift given over this amount would result in a gift tax return to be filed, but the recipient of the gift would never pay any tax on any gift received.

Inheritance Received

The estate of the person that passed away pays estate and inheritance taxes before any heirs are paid. 

Life Insurance Payouts

If a loved one passes away and leaves a life insurance benefit it is generally nontaxable.  There can be some complex situations with life insurance and there are some exceptions where the benefit would be taxable.

Municipal Bond Interest

When you invest in a corporate bond you have to pay tax on the interest earned.  When you invest in municipal bond the interest is tax free.  Despite being nontaxable for federal purposes there can be situations where the municipal bond interest can be taxable on your state tax return.

We just discussed some of the common forms of income that are nontaxable at the Federal level.  It is also worth mentioning that some states do not have an earned income tax for individuals.  Those states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.  This makes these states especially attractive to retirees.

As we discussed, most income earned is taxable.  There are some instances where income is also nontaxable.  Do you think you might have some nontaxable income?  Give us a call and we can make a determination for you.