Income may be found in the form of cash, other money, property, or services. Unless the IRS specifically exempts the income by law, all income is subject to tax and must be reported on your annual tax return. Because there are some sources of nontaxable income you may not know about, this post will report some of the more obscure types of nontaxable income.
For these nontaxable items, you may still need to report them on your annual tax return when you prepare it, but you will not be paying taxes on them. If you are unsure how to file your own tax return this coming tax season, you should work with a qualified tax consultant or tax accountant who is trained in tax law. You may want their expertise.
Frankly, there are many reasons to involve a qualified tax professional when filing your tax return this year. Provided you work with someone qualified, you should reduce your chance of a tax audit, and he or she can possibly represent you in the event of a tax audit, which is a very beneficial thing if you are at risk for receiving an IRS tax audit.
The nice thing about working with someone who knows tax laws and understands them well is that they will help you get your information reported the right way the first time around. If you are unsure whether the income you’ve received is taxable or not, this post should help clear things up. We’ll take a look at many of the misunderstood types of income.
We’ll uncover the difference between taxable and nontaxable income and go over many sources of nontaxable income. Also, we’ll take a look at some of the more frequently asked questions in regards to taxable and nontaxable income. This way, you will know exactly what to report on your taxes and won’t end up with an unexpected tax bill after a tax audit.
What is taxable and nontaxable income?
Taxable income is reported and taxed on your annual tax return, while nontaxable income is typically not taxed at all. Taxable income includes cash payments, settlements, and winnings from gambling, for example. Some types of nontaxable income are child support and adoption assistance received from your employer to help with adopting a child.
Nontaxable income is like a tax exemption; you do not have to pay taxes on it to the federal government. While it is considered to be tax-free income, there are cases where you may need to pay a portion of it in taxes or report it on your tax return, even if you do not have to pay taxes on it. During the tax year, it is advisable that you work with a tax consultant for the best results.
Type of Nontaxable Income
If you receive disability benefits from the SSA (Social Security Administration), this is considered to be nontaxable income. This money is something that you do not have to pay taxes on because public welfare funds are nontaxable.
2. Death Benefits
Certain money received after an employee’s death is considered to be taxable. However, an exclusion occurs when someone was a public safety officer killed in the line of duty. Also, beneficiaries of a private life insurance policy are not required to pay taxes on any death benefits they receive.
Death payments due to a terrorist attack or military action are considered to be nontaxable. Also, for astronauts who died in the line of duty after the year 2002, the death benefits are non-taxable.
3. Some Capital Gains Received from the Sale of a Home
A certain portion of capital gains on the sale of real estate is nontaxable. Make sure you understand how capital gains and capital losses work before assuming you will not have to pay taxes on it.
4. Educational Assistance Received from Your Employer
Educational help received from your employer, up to a certain amount, is considered to be nontaxable, and you do not have to pay taxes on this amount. Learn more about education and taxes with our article on the subject.
Certain inheritances are nontaxable. Learn more about taxes and inheritances with our article on the subject.
6. Life Insurance Payouts
If you received payments from a third-party insurance company, these payments are usually considered to be nontaxable. This means you typically do not need to pay taxes on the money received as part of an HSA (health savings account) plan or other arrangements.
Typically, since the people who have given you gifts have already paid taxes on them, like sales tax, you do not pay taxes on gifts. However, there is a threshold per year if you receive a certain dollar amount from a single source during the tax year.
One exemption to this is gifts from employers. These gifts, which are considered to be fringe benefits, are nontaxable if they are less than $25 per employee.
8. Some Withdrawals from Roth IRA Accounts
Contributions made to a Roth IRA account are tax-free when they are distributed. You are also not taxed on the money in a retirement account that is provided as an inheritance. Traditionally, for traditional retirement plans, you or your employer have paid the premiums, and you are assessed tax on all payments received.
9. Adoption Assistance Received from Your Employer
If your workplace offers adoption benefits, these are typically considered to be nontaxable. You do not have to pay taxes on this amount up to a specific threshold.
10. Workers Compensation
If you’re injured on the job and receive worker’s compensation from your employer’s insurance company, this is considered to be nontaxable. If you are in an accident that was not through a fault of your own, and you receive compensation, this amount is nontaxable.
Likewise, compensatory damages for permanent disfigurement, physical injury, and other injuries are also nontaxable.
Frequently Asked Questions
What is the difference between income and taxable income?
Income is the profits or earnings your employer pays you or the winnings you earn from gambling. If you sell goods and services, the amount you receive as profit is considered to be taxable income. Income, in general, is the profits you receive, taxable or not.
What is the difference between taxable and nontaxable income?
Taxable income means you must pay taxes on the income you received during the tax year. Nontaxable income, in most cases, still must be reported when you complete your annual tax return, but you will not be required to pay taxes on it because it’s nontaxable.
What is annual nontaxable income?
Your annual nontaxable income is the amount of income you receive in the tax year that is not considered to be taxable income. This amount may be the employer-paid portion of your health insurance as reported on IRS Form W-2 or as received while you were an employee.
What type of income does not need to be reported to the IRS?
Typically, if you earn less than a specified amount during the tax year, you do not need to report your income to the IRS on an annual tax return, but this depends on many other factors. For example, some factors to take into consideration include your filing status and age. Check with the IRS before deciding not to turn in an annual tax return.
What needs to be included in the income you report to the IRS?
Income is considered to be money (cash or other funds received), property, or services received throughout the year. You are generally required to report all income you receive unless otherwise stated by the IRS under the tax laws for the tax year.
Are you still having trouble determining if your income is taxable or nontaxable? Does the idea of taxable versus nontaxable confuse you? Do you wonder if you need to report your income on your tax return? Are you wondering how much you will need to pay in taxes given your income?
These questions can be overwhelming when trying to do your taxes correctly the first time around. You may feel a bit overwhelmed or confused with all the tax laws and reporting requirements. It’s understandable; it’s a lot to take in. Often, your best bet is to work with a qualified tax professional, someone who can walk you through your taxes easily.
A qualified tax accountant can help make sure your taxes are done the right way so that you aren’t caught off guard by the response you receive from the IRS. For example, if your losses far exceed your gains, you may hit an audit trigger, and the IRS may come knocking on your door with a tax audit, ending with an unexpected tax bill, something you don’t want.
At Borshoff Consulting, we understand this; that’s why we strive to help you see positive results, getting you the best tax benefits that we can on your tax return. Need some business counsel? Tax resolution is not the only thing we specialize in; we also do business consulting and help with management issues. You can trust Indiana’s tax expert to lead you in the right direction.