Everyone needs to pay tax (Federal and State taxes) on most income coming from work or investment. There are, however, some sort of income you will not have to pay taxes on.
This article explores some of such income.
Disability Insurance Payments
If your employer paid premiums for the policy, the benefits would be taxed. There are, however, situations when disability benefits cannot be taxed.
All benefits that are from supplemental disability insurance that you got with after-tax dollars from your employer.
Benefits that are from a private disability insurance plan you got with the after-tax dollar.
Worker’s compensation payments
Compensatory damages for sickness and injury, permanent disfigurement or loss of any body part
Disability benefits coming from public welfare funds
Employer-Provided Insurance
According to the IRS:
"in most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income."
The health insurance coming from your employer falls into this category as well - Health insurance from a third party. This includes coverage and reimbursement for medical care coming from a health reimbursement arrangement (HRA). Long term care insurance from your employer as well cannot be taxed.
Health Savings Account
Distribution from the health savings account cannot be taxed, provided they used it for qualified expenses. Health savings accounts only apply to people that subscribe to a high-deductible health insurance plan.
Income Earned in the Seven States
When it comes to taxes, all states are not equal. There are seven states with no income taxes – Texas, Washington, Florida, Nevada, Alaska, Wyoming, and South Dakota. Tennessee and New Hampshire also do not tax salary income but dividends and interest income. There are states as well that do not tax Social Security and pension, although these are taxed at the federal level.
Financial Gifts
The IRS specifies that it is the giver of a financial gift and not the recipient that pays tax. Currently, there is no need for taxes on gifts amounting to $15,000 for each recipient in a year. This value is double for couples making gifts. Although there is no tax on such a gift, any income coming from the gift like dividends will have to be taxed.
Besides, the following types of gifts cannot be taxed.
Medical expenses and tuition you paid for someone
Donations to politics
Charity gifts.
A financial gift like gift cards or cash from an employer is an exception to this rule. The IRS does not classify them as gifts but fringe benefits. The exception to this is a gift of reasonable value that does not come frequently. It is called a de minimis benefit and not taxed. A birthday fruitcake is a perfect example.
Municipal Bond Interest
All income you receive from invested bonds will be subjected to federal and state taxes. There is, however, an exception to this – municipal bond. The state, alongside other government entities, do issue this. Provided you reside in the state issuing the bond, the income is tax-free at the state, federal, and local levels. However, if you buy these bonds via an ETF or a municipal bond, that is the exception.
Compared to other bond types, municipal bonds pay less. However, you might get a better after-tax return, which is a factor of your tax bracket compared to other taxable entities.
Roth Retirement Account Income
There are retirement accounts like 401(K), IRAs, and 403(b) plans that come with some advantages. One of such is tax postponement on investment till you withdraw the funds. The money you withdraw on Roth IRAs, Roth 403(b)s, and Roth 401(k)s cannot be taxed at all provided you meet the rule guiding Roth’s.
Up to $3,000 of Income Offset by Capital Losses
For all investment sales that turned to a loss, there is the opportunity to reduce your taxable income up to $3,000 each year. You can even carry the capital loss as each year goes by until you offset the entire decline. A perfect example is selling an investment at a loss of $5,000 in 2019. You can remove $3,000 from your taxable income on your 2019 tax return and the $2,000 left from your income on the 2020 tax return.
Conclusion
You can get more information on taxable and nontaxable income from the IRS Publication 525. This publication is updated yearly.
