In a tough economy, many taxpayers are looking for extra money – without the added tax burden. In other words: what could you put in your pocket and not be taxed?
Taxable income is defined at 26 USC §63 as gross income less deductions. Gross income is defined at 26 USC §61 as “all income from whatever source derived.” That sounds pretty inclusive, right? Except that the Tax Code goes on to exclude several items. Here are 44 sources of money and benefits that aren’t taxable for federal income tax purposes:
1. Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your taxable income.
2. Funds from GoFundMe and other fundraising campaigns. Assuming there is no business purpose or other non-donative intent, funds received by fundraising campaigns like GoFundMe are not taxable. The donations would be considered gifts: there’s no consideration given in return, no services rendered, no products being touted (there are no premiums for donations, and it doesn’t fit the crowdfunding for business model). The result can be different when crowdfunding is used for business or investment purposes.
3. Child support payments. Some parents are hesitant to seek out a child support order because, among other things, they fear the extra check would add to taxable income and reduce other benefits, like the Earned Income Tax Credit (EITC). While alimony may have tax consequences (depending on the timing), child support is completely tax-neutral, meaning that there’s no deduction to the payor, and it’s not taxable to the recipient.
4. Sale of your home. You can exclude the gain from the sale of your home – up to $250,000 for single taxpayers and $500,000 for married taxpayers – so long as you have owned and lived in the home for two of the five years before the sale.
5. Short term rental income. If you rent out your personal residence for fewer than 15 days in a year, you need not report any of the rental income for federal income tax purposes (nor do you deduct any expenses as rental expenses).
6. Kiddie income. The general rule for children and other dependents is that if income is earned (salary or wages through full- or part-time employment), it is taxed at the child’s tax rate, which means that income under the filing threshold is not taxable. For 2020, what’s old is new again since the SECURE Act repealed the more draconian kiddie tax rules put in place under the Tax Cuts and Jobs Act (TJCA).
7. Health care insurance. Health insurance benefits, including premiums paid on your behalf by your employer, are generally not taxable – even though they are reported on your form W-2.
8. Long-term health care insurance. As with health insurance, employer-provided long-term health care insurance (meaning that your employer is paying the premiums) is not taxable.
9. Health savings accounts (HSA). If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA; those contributions are not included in your income. Additionally, when you take the money out to pay qualified medical expenses, it’s not included in your income. There’s additional flexibility in some plans as a result of the pandemic; check with your HR person for more.
10. Dependent care benefits. Benefits made available by your employer in the form of a dependent care assistance plan (DCAP) or dependent care flexible spending account (FSA) are not taxable so long as employer contributions do not exceed $5,000 ($2,500 if married filing separately).
11. Employee achievement award. If you receive tangible personal property – generally, a thing you can touch like cufflinks or the dreaded grandfather clock – as an employee achievement award, you generally can exclude its value from your taxable income. And yes, it has to be tangible personal property to be excluded since cash, a gift certificate, or an equivalent item are taxable, even if given for the same reason as you received a lovely painted ceramic dog. Under the TCJA, it’s also clear that tangible personal property doesn’t include gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities, and other similar items.
12. Deferred compensation and retirement plans. This is kind of sneaky on my part since these plans aren’t so much tax-exempt as they are tax-deferred. The total amount of deferrals for the year under a deferred compensation plan is generally not included in your income until you make a withdrawal. Bonus? You can contribute to an IRA right up until Tax Day (which is July 15 in 2020), and you can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan. And now, as a result of the CARES Act, you can also make certain withdrawals on a tax-favored or tax-deferred basis.
13. Sick pay benefits from certain insurance policies. If you are sick or injured and receive compensation from your employer, that’s taxable, as is money from a welfare fund; a state sickness or disability fund; an association of employers or employees; and an insurance company, if your employer paid for the plan. However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable.
14. Gym benefits. If your employer provides you with free or low-cost use of an employer-operated gym or other athletic club on work premises, the value is not included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children. But if your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation.
15. De minimis (Minimal) benefits. De minimis is Latin for “you’re not getting a real perk.” I’m kidding. It’s really Latin for “of minimum importance” or “trifling,” which, quite frankly, sounds worse. But if your employer provides you with a product or service – like a cell phone – and its cost is so small that it would be unreasonable for the employer to account for it, the value is not included in your income.
16. Employee gifts at the holidays. I know you really want the cash, but your employer is doing you a favor at the holidays when they give you a turkey or a fruit basket. Those items don’t count as income to you. But if your employer gives you cash, a gift certificate, or a similar thing that you can easily exchange for money, it’s no longer considered a gift even if it comes in a big fat Santa card: it’s compensation and therefore, taxable.
17. Employee discounts. If your employer sells property or services to you at a discount, you generally don’t have to include the amount of the discount in your income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work and not for real property or property commonly held for investment (such as stocks or bonds). As a former employee of the Gap, I happen to appreciate this exception.
18. Tickets for theater or sporting events. Tickets for events are tax-free if they’re from your employer – so long as they’re for occasional use only (not so for season tickets, not that we have much of any season to speak of).
19. Life insurance proceeds. In most instances, life insurance proceeds, other than dividends and premium refunds, are not taxable for federal income tax purposes.
20. Long-term health care insurance. The IRS typically treats long-term health care insurance benefits like health insurance benefits, which means that the proceeds are generally not taxable.
21. Meals or lodging on work premises. You don’t have to include, as compensation, the cost of meals served on your employer’s premises so long as they’re furnished for the convenience of your employer.
22. Transit passes or parking permits. If your employer provides a qualified transportation fringe benefit, such as a transit pass or parking permit, it can be excluded from your income, up to certain limits. Unfortunately, the TCJA eliminated employer deductions for those benefits, so your employer may no longer offer them.
23. Employer-provided vehicles. If your employer provides a car to you for business use, your personal use of the vehicle is usually a taxable noncash fringe benefit.
24. Airline miles. Airline miles you earn from travel – even if your employer pays for the trip – are tax-free. Be careful: the same result is not necessarily true if you “earn” miles from bank and third-party promotions.
25. Veterans’ benefits. Veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA) are exempt from tax.
26. Workers’ Compensation. Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if paid under a workers’ compensation act or a statute like a workers’ compensation act. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury. (Note that unemployment benefits are different, and are taxable.)
27. Compensatory damages. Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments are not taxable.
28. Some canceled debts. Most – but not all – canceled debt is actually taxable. You would not be taxed on debt canceled in a bankruptcy case under Title 11 of the U.S. Code or to the extent that you are insolvent as defined by the Internal Revenue Service (IRS).
29. Welfare and other public assistance benefits. Governmental benefit payments from a public welfare fund based upon need, like SNAP, are not taxable.
30. Disaster relief payments. You can exclude from income any amount you receive that is a qualified disaster relief payment.
31. Medicare. Medicare benefits received under title XVIII of the Social Security Act are not included in taxable income. This includes Part A and Part B.
32. Many Social Security retirement benefits. If your only source of income is Social Security retirement benefits, your benefits are generally not taxable. However, if you received income from other sources, your benefits would be taxed if your modified adjusted gross income (MAGI) is more than the base amount for your filing status.
33. Social Security Disability Insurance (SSDI) benefits. Like Social Security retirement benefits, SSDI benefits are typically not taxable. However, if you receive SSDI and another source of income, your benefits may be taxed.
34. Supplemental Security Income (SSI) benefits. SSI benefits are not taxable.
35. Roth IRA distributions. A Roth IRA allows for contributions to be made out of after-tax assets. Since the tax is already paid on assets used to fund a Roth IRA, there’s no tax payable on the withdrawals/distributions. (The same rule generally applies for Roth 401(k) plans.)
36. Cash rebates. A cash rebate from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate (if applicable).
37. Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of the exchange rates, you do not have to report it unless it is more than $200. If the gain is more than $200, it’s typically treated ordinary income unless an exception applies. (Be careful: cryptocurrency is not treated the same as foreign currency and is instead treated as a capital asset.)
38. Interest on qualified savings bonds. You may be able to exclude from income the interest from qualified U.S. savings bonds (Series EE issued after 1989 or series I) you redeem if you pay qualified higher educational expenses in the same year. The bond must have been issued to you when you were 24 years of age or younger.
39. Municipal bond interest. Interest is paid on municipal bonds is typically tax-exempt for federal income tax purposes.
40. Scholarships and fellowships. You don’t have to pay tax on amounts received as a qualified scholarship or fellowship used to pay tuition and fees to enroll at or attend an educational institution, or fees, books, supplies, and equipment required for courses at the educational institution so long as you’re a degree candidate. Amounts used for room and board do not qualify, and other exceptions may apply.
41. Educational assistance from your employer. You can exclude up to $5,250 of educational assistance you receive from your employer – including tuition and fees, books, supplies, and equipment – so long as you meet certain criteria.
42. Tax refunds. Tax refunds you receive from the federal government are not taxable. However, state or local tax refunds may be taxable to you if you had previously deducted the entire amount as paid.
43. Stimulus Checks. Yes, it’s true. Those Economic Impact Payments, sometimes called stimulus checks, are tax-free for federal income tax purposes.
44. PPP Loan Forgiveness. Under the CARES Act, PPP loans that are forgiven are not included in taxable income.
See? Even though it feels like everything is taxable, it’s really not. You get a break here and there. Check with your tax professional if you have specific questions or something doesn’t make sense to you.