15 types of tax-free and non-taxable income
Tax-free, or non-taxable, income is income you receive that is not subject to taxes. If money you receive is taxable, be prepared to pay federal taxes and state taxes, depending on which state you live in. Here are 15 examples of non-taxable income.
1. Accelerated death benefits
If you purchase life insurance, you may have a rider for living benefits coverage, such as accelerated death benefitsIf you are diagnosed with a chronic, critical or terminal illness that is certified by a physician and have this provision in your life insurance policy, you can receive a non-taxable cash advance up to the policy limit as a living benefit. Death benefits received while alive decrease the death benefit your beneficiary gets when you pass.
2. Child support
If you receive child support payments, those payments are non-taxable income and should not be included when you file your taxes.
3. Disaster relief assistance
If you are a disaster victim and qualify for relief assistance payments or other types of compensation, they are usually non-taxable income. In order to qualify, the disaster relief is based on FEMA’s individual assistance declarations and announced by the IRS as tax relief granted.
4. Employer assistance
There are a couple of ways your employer can provide financial assistance that are considered non-taxable income. If your employer provides adoption assistance, you can get an adoption credit up to $14,440 for the 2021 tax year. The amount varies by your modified adjusted gross income (MAGI) and whether you claimed qualified adoption expense credits in previous years.
Separately, if your employer has an education assistance program set up, you may qualify for up to $5,250 per year in benefits and it won’t be taxed as income.
5. Employer-provided accident and health plans
Certain accident and health plans offered by your employer are also considered non-taxable income. Contributions to an Archer MSA or long-term care plan are not taxable. Employer contributions to a health spending account like an FSA, HRA or HSA are non-taxable income. Qualified reimbursements from these accounts are also tax-free. The growth in an HSA is tax-free income as well. You can invest the funds in an HSA once it reaches a certain balance (typically around $2,000), and the growth in these accounts is completely tax-free at the federal level. Most state revenue departments conform to this as well.
6. Employer-provided group term life insurance
Many employers offer group benefits as part of your compensation package. If group term life insurance is provided, the cost of the first $50,000 in life insurance is considered non-taxable income to the employee. Any amount over $50,000 may be considered income based on the cost of coverage.
7. Energy conservation subsidies
Some public utility companies will offer subsidies in the way of rebates or rewards for replacing old appliances in your home with energy efficient appliances. If you replace your refrigerator, update your HVAC system or have a geothermal heating system installed, any direct or indirect subsidy provided for the installation or purchase is tax-free.
8. Foster care payments
Foster parents who care for children who have been placed in their home may receive government payments to help pay for expenses. These payments are usually considered non-taxable income.
9. Financial gifts
If you receive assets or cash gifts from friends, family or an employer, the gift is non-taxable income. The giver may be required to pay gift tax, however, potentially at the federal and state level.
10. Illness and injury benefits
There are several types of illness and injury benefits that are usually non-taxable income:
- Black lung benefits.
- Disability insurance payments if paid with after-tax dollars or paid by your employer.
- On-the-job injury compensation under the Railroad Unemployment Insurance Act.
- Federal Employees’ Compensation Act (FECA) benefits.
- Medical care reimbursements that have not been deducted in previous tax years.
- Medical payments and personal injury protection payouts under a car insurance policy.
- Qualified Indian health care benefits received after March 23, 2010.
- Workers’ compensation payments paid under a workers’ compensation act. Disability pension payments in combination with workers’ compensation and salary payments made if you return to work on light duty are taxable income.
An inheritance received when someone passes is generally tax-free if it’s under $11.7 million as of the 2021 tax year. The inheritance is always tax-free for the recipient at the federal level. Any taxes owed are paid by the deceased’s estate, if applicable.
Some states have estate taxes, which are charged on assets. Others have inheritance taxes, which are charged on asset transfer and vary by state and the relationship of the deceased and heir. Iowa, Nebraska, Kentucky, New Jersey and Pennsylvania have inheritance taxes. There are several states that have estates taxes:
- New York
- Rhode Island
- Washington, D.C.
Maryland is the only state with both estate and inheritance taxes.
12. Interest on municipal bonds
Usually, interest income received on bonds is taxable on the federal and state level. However, municipal bonds issued by the federal government and state entities are an exception. These bonds are used to fund public infrastructure, repairs and financing. If you own municipal bonds that are issued in the state you live in, the interest income generated generally is non-taxable income. You may still be subject to short-term or long-term capital gains taxes upon sale of the bond.
13. Life insurance death benefit
If you are listed as a beneficiary on a life insurance policy, the death benefit proceeds from the policy are generally considered non-taxable income. Interest earned on life insurance proceeds could be taxable.
14. Principal residence proceeds
If you sell your home for a profit, you may be able to exclude up to $250,000 as a single filer and $500,000 as a married joint filer from taxation. To qualify for this capital gains tax exemption, you must own your home and use it as your primary residence for at least two of the last five years.
15. Roth IRA income
Investment income and gains in a 401(k), 403(b) plan and traditional IRA are taxed when you withdraw the money. However, with Roth 401(k)s, Roth 403(b) plans and Roth IRAs, you contribute post-tax dollars, so qualified distributions can be withdrawn tax-free.
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