Posted by Elliot Kravitz, ATP

Types of Income the IRS Can’t Touch

Types of Income the IRS Can’t Touch

As you are probably aware, the large proportion of your income is taxable. Whether earned through a salary, hourly wages, tips, commissions, rent from a property that you lease or through interest and dividends on your investments. You are required to pay taxes.

Barter income is taxable. Assuming you exchange your hair-cutting services for lawn-cutting services although it may seem like a fair trade according to the IRS; you must pay tax on the fair market value of the mowing services you receive.  

If you decide to do something unsavory and embezzle funds from your employer or your book club, such income is also taxable. The IRS states explicitly that kickbacks and embezzlement proceeds are subject to income tax. 

Is there any way an income-earning taxpayer can catch a break? There are a few types of income that are considered tax free. Here are some examples of income the IRS cannot touch:

1. Veterans' Benefits

Benefits that are given to veterans and their families are nontaxable. They include training, Education, and subsistence allowances.

Compensation for disability and pension payments for disabilities

Grants for homes made for  disabled on wheelchair

Donations that are for motor vehicles for veterans who lost the use of their limbs or use of their sight

Dividends and insurance proceeds paid either to veterans or their beneficiaries

Interest on insurance dividends left on deposit with the Veterans Administration

Benefits under a dependent-care assistance program

The death gratuity paid to a survivor of a member of the Armed Forces who passed on after September 10, 2001

Payments that are done under the compensated work therapy program are tax-free.

2. Child Support Payments

Amount of money received for child support is not taxable.

3. Welfare Benefits

IRS does not tax welfare payment.

4. Workers' Compensation

If you get workers’ compensation for any employment-related illness or injury, this income is exempted from taxes for payments that are made under a workers’ compensation act.

5. Foster Care Payments

If you are a foster parent getting foster payments from a child placement agency or the state or local government, this type of income is not taxable.

6. Casualty Insurance

Casualty insurance payments you receive are not taxed unless the fees are more than your loss. 

7. Payments from a State Crime Victims' Fund

Payments secured from a state fund for the victims of crime are not taxable. 

8. Inheritances

Federal taxes are not required if you receive an inheritance from a relative, a deceased friend, or even an acquaintance. That is because the estate of the deceased pays all the taxes if any are due before you receive the inheritance. Some states impose state taxes on legacies.

9. Disaster Relief Grants

Disaster Relief and Emergency Assistance Act state that, if an individual receives post-disaster relief grant payments and uses the income to meet your necessary expenses or needs for medical, housing, dental, personal transportation property,  or funeral expenses, this income is tax-free.

10. Black Lung Disease Benefits

All federal black lung benefit payments you receive via the Division of Coal Mine Workers’ Compensation (DCMWC) is non-taxable.

11. Supplemental Security Income

The program of the U.S. government provides monthly benefits to low-income individuals who are 65 years or older, disabled or blind. The  Administration of the Social Security administers the Supplemental Security Income (SSI) program, but the fund for it comes from U.S. Treasury general funds, the payments of the SSI are tax-free.

12. Interest on State or Local Government Obligations

The IRS states that interest on a bond used to finance government operations is usually not taxable if a state issues the bond. 

13. Compensatory Damages Given for Physical Injury or Sickness

Damages are given for physical injury, physical illness or emotional distress caused by a bodily injury or sickness are usually tax-free.

14. Gambling Income 

Gambling income is tax-free only if your losses are more than your winnings for the tax year. But if your gambling income is above your losses, then that income is taxed. You need to differently report on your tax forms, winnings as income and can deduct losses up to the number of your winnings if you list your deductions.

15. Gifts

If you get some monetary contributions from a relative or friend, you do not owe the government taxes on that income. If the gift exceeds $15,000, the giver may owe gift tax, but you do not.

16. Combat Pay

The income you receive while placed in a combat zone is typically not taxable.

17. Vacation Rental Income (Limited)

Renting your home or vacation property for 14 days or less period, the rental money you got is tax-free.

The Bottom Line

It most times seems that the IRS manages to take a bite out of every type of income you could earn, there are quite some exceptions to that rule. 

Elliot Kravitz, ATP
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