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To file or not to file?

 That’s the question that has been posed many times over the past week or so with respect to protective claims for refund for 2016 tax returns. Here’s what you need to know.

The Supreme Court of the United States (SCOTUS) is slated to consider California v. Texas this fall. The case will consider three issues:

1. Whether the individual and state plaintiffs in this case have established Article III standing to challenge the minimum coverage provision in Section 5000A(a); 

2. Whether reducing the amount specified in Section 5000A(c) to zero rendered the minimum coverage provision unconstitutional; and

3. If so, whether the minimum coverage provision is severable from the rest of the ACA.

The Patient Protection and Affordable Care Act (ACA) established a mandate that individuals carry minimum essential coverage or make a “[s]hared responsibility payment.” In 2012, a challenge to ACA went to SCOTUS, where it was found to be constitutional. Specifically, the Court determined that Congress had the authority to regulate tax and found that the mandate, as written, could be interpreted as a tax, and therefore it was constitutional. You can read a little background on the Act here.

In 2017, Congress set the ACA penalty at zero (which is different, legally, from eliminating the penalty), but otherwise left the Act intact. But that tweak led to the current filing. Some states, with Texas at the helm, have argued that since the penalty for not buying health insurance is now zero, it’s no longer a tax. If there’s no tax, they posit, then Congress doesn’t have the right to regulate it, and the mandate is unconstitutional. And, further, if you can’t separate the mandate from ACA, the rest of the law must be struck down.

Some other states, led by California, disagree with that take.

Since there were competing positions affecting states, the matter went before SCOTUS. SCOTUS refused to fast-track the decision but did agree to hear it. Briefs have been filed, and oral arguments are expected in 2020.

So, what does all of this have to do with your tax return?

It’s possible that SCOTUS could decide that ACA is unconstitutional. That would affect not only the shared responsibility penalty but also the related ACA-taxes, like the net investment income tax (NIIT) and the Medicare surtax. If that happens, some tax professionals believe that it might create an opportunity to recover ACA taxes paid in previous years. And since 2016 is one of those years, there is a limited window to file a protective claim for refund. Specifically, the protective claim must be filed by Tax Day, which for 2020 is July 15, 2020.

Here’s what the IRS says.

Generally, the taxpayer must file their claim for a credit or refund within 3 years after the date they filed their original return or within 2 years after the date they paid the tax, whichever is later.

 As a result of COVID-19, the due date to file a protective claim for the tax year 2016 individual income tax returns has been postponed until July 15, 2020. To file a protective claim for the tax year 2016, taxpayers make sure their claim is properly addressed, mailed, and postmarked by July 15, 2020.

According to the IRS, a valid protective claim doesn’t have to list a particular dollar amount or demand an immediate refund. However, a valid protective claim must:

  • Be in writing and signed;
  • Include your name, address, SSN or ITIN, and other contact information;
  • Identify and describe the contingencies affecting the claim;
  • Clearly alert the IRS to the essential nature of the claim; and
  • Identify the specific year(s) for which a refund is sought.

You can find out more on the IRS website here.

So, all of this has resulted in many folks wondering whether to file a protective claim. Like you, I don’t have a crystal ball. But here’s my take: it’s a very individual decision. Case-by-case. I don’t think a blanket “file a protective claim” works for everyone. For the ACA taxes to disappear for 2016, there has to a perfect storm of facts. Consider this:

  • First, SCOTUS has to find the mandate unconstitutional.
  • Second, SCOTUS has to rule that the mandate cannot be separated from ACA, making the entire Act unconstitutional.
  • Third, if SCOTUS does find ACA unconstitutional, they have to rule that the taxes were unconstitutional for previous years – including 2016. Keep in mind that in 2016, the mandate still existed. So if a zero penalty means that there’s no tax, and thus no ACA, that doesn’t mean that the same result applies to the previous years when the penalty still existed. 

Even if all of that falls into place, ACA taxes do not affect all taxpayers. For example, the NIIT and Medicare taxes generally apply to individual taxpayers with an adjusted gross income (AGI) of $250,000 or more for married filing jointly or $200,000 for single taxpayers.

The 3.8% NIIT doesn’t apply to all income. It typically includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from “passive activities” in business, and income from businesses involved in the trading of financial instruments or commodities. For NIIT purposes, capital gains include those not only from stocks and real estate but also gold and crypto. (You can read more here.) The tax is 3.8%, so $10,000 of qualifying income would result in a $380 tax.

And the 0.9% Additional Medicare Tax applies to wages, compensation and self-employment income, but it does not apply to income items included in NIIT. So, using the same numbers, $10,000 in wages would result in $90 of surtax.

So, for most taxpayers, even if all of the stars aligned to eliminate the ACA taxes, the numbers involved could be small and, therefore, possibly not worth the time and expense to file a protective claim. However, if all of the stars aligned to eliminate the ACA taxes, and you are (or represent) a taxpayer that would be significantly affected, it could be worth it.

The bottom line? The question of whether to file a protective claim is personal and is fact and circumstance dependent. If you’re not sure how to proceed, I highly recommend talking with your tax professional.

It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

H is for Head of Household.

I know what you’re thinking: Head of Household is an easy one. That’s because we’re so used to seeing it: one of the first pieces of information you share with the Internal Revenue Service (IRS) is your filing status. Your filing status impacts your tax rates, your qualification for certain tax deductions and credits, and more.

You can choose from one of five filing statuses on a federal tax return:

  • Single;
  • Married Filing Jointly;
  • Married Filing Separately;
  • Head of Household; and
  • Qualifying Widow(er) With Dependent Child.

Easy-peasy, right?

Maybe not. One of the things that I have realized this filing season – largely due to the scramble to understand how to qualify for stimulus checks – is that there are many misconceptions about filing status. And Head of Household is at the top of the list.

So, first, the basics. For federal income tax status, marital status is determined by state law as of the last day of the calendar year. If you are married on December 31, you are considered married for the year (married filing jointly or married filing separately). If you’re not married on December 31 because you were never legally married or you were legally separated or divorced according to the laws of your state, you are not married (single, head of household, or qualifying widow(er) with dependent child). It typically doesn’t matter what happens in between.

Most of those filing status options are pretty straightforward. But head of household can be tricky. You can file as head of household IF:

  1. You are unmarried or considered unmarried on the last day of the year; AND
  2. You paid more than half the cost of keeping up a home for the year; AND
  3. qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the qualifying person is your dependent parent, he or she doesn’t have to live with you.

To figure that you, you need some further definitions.

First, you are considered unmarried on the last day of the year if:

  1. You file a separate tax return; AND
  2. You paid more than half the cost of keeping up your home for the tax year; AND
  3. Your spouse didn’t live in your home during the last six months of the tax year (your spouse is considered to have lived in your home even if he or she is temporarily absent due to special circumstances like illness, school or military service); AND
  4. Your home was the main home of your child, stepchild, or foster child for more than half the year; AND
  5. You must be able to claim that child as a dependent (unless you qualify for an exception). 

And, a qualifying person is:

  1. A qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests) who is either single or is married, but you can claim as a dependent; or
  2. A qualifying relative who is your father or mother who you can claim as a dependent; or
  3. A qualifying relative other than your father or mother (such as a grandparent, brother, or sister who meets certain tests) who lived with you more than half the year, and you can claim as a dependent. This may include your child, stepchild, grandchild or other descendant of one of your children (or stepchildren or foster children), son-in-law, daughter-in-law, brother, sister, half brother, half-sister, stepbrother, stepsister, brother-in-law, sister-in-law, parent, stepfather, stepmother, father-in-law, mother-in-law, grandparent, great-grandparent, and, if related by blood, aunt, uncle, niece, or nephew.

For purposes of a qualifying person, the IRS even drew up a table for you. It’s the infamous Table 4 that you’ll see referenced over and over in head of household conversations:

You can view Table 4 in full-size by checking out IRS Pub 501, Dependents, Standard Deduction, and Filing
Information
(downloads as a PDF).

But here’s the bit that you need to take away. According to Pub 501, “Any person not described in Table 4 isn’t a qualifying person.”

That seems pretty simple, but many family situations are not terribly simple. So let’s run through some examples that folks are often confused about.

First, spouses. Your spouse is not your dependent. And you must have a qualifying dependent to file as head of household status. So, if you are married without any other dependents, you may not claim head of household status (you would typically opt for married filing jointly). And if you are married but not considered unmarried (yes, I see those double negatives), you typically cannot claim head of household status even if you support other relatives.

What about your significant other? Your significant other may, under some circumstances, qualify as your dependent. However, your significant other is not a qualifying person under the head of household rules because he or she is not related to you.

What about your significant other’s child? Same result. You may be able to claim the child as a dependent, but the child is not a qualifying person for purposes of head of household status because the child is not actually related to you.

What about your own child if you live with your significant other? Finally, a yes. You can file as head of household if you have a qualifying child (or other qualifying person) who lives with you and your significant other so long as the child meets the other criteria.

After re-reading many of your emails, I think the confusion boils down to this one thing: a dependent is not always a qualifying person for purposes of head of household. You have to run through all of the tests.

I know that some of you may have your finger on the email button, ready to send me emails to the contrary. That may be because some websites do claim that your significant other or significant other’s child is a qualifying person for purposes of head of household. But that’s not correct. The IRS confirms as much in Pub 501 (the link is above at the chart), with the following examples:

Example 3. Your girlfriend lived with you all year. Even though she may be your qualifying relative if the gross income and support tests (explained later) are met, she isn’t your qualifying person for head of household purposes because she isn’t related to you in one of the ways listed under Relatives who don’t have to live with you .

Example 4. The facts are the same as in Example 3 except your girlfriend’s 10-year-old son also lived with you all year. He isn’t your qualifying child and, because he is your girlfriend’s qualifying child, he isn’t your qualifying relative (see Not a Qualifying Child Test , later). As a result, he isn’t your qualifying person for head of household purposes.

It’s confusing – so much so that the IRS requires preparers to complete a form confirming that they’ve performed due diligence for head of household filing status. It’s Form 8867, Paid Preparer’s Due Diligence Checklist (downloads as a PDF). The penalty per failure to be diligent is $530 for returns or claims for refund filed in 2020.

 If you’re still not sure whether you qualify as head of household, you may want to try the IRS’ interactive filing status tool. You can find it here.

You can find the rest of the series here:

It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

F is for FTE.

FTE is one of those terms that many folks had never heard of before the Paycheck Protection Program (PPP). But FTE did exist. In the pre-PPP world, FTE (full-time equivalent) means the hours worked by an employer on a full-time basis. And before COVID-19 and Small Business Administration (SBA) loans, FTE was typically a measure of how part-time employees compared to full-time employees for the sake of, among other things, determining payroll efficiency.

The PPP uses FTEs as a metric to compute loan forgiveness. Specifically, one of the loan forgiveness conditions is proving that you maintained the same number of FTEs during the 24-week PPP period as you did before COVID-19. The actual number of employees may not be the same as it was pre-COVID-19 (due to turnover, different levels of hiring, etc.), but the FTE needs to remain the same.

Treasury defines an FTE as an employee who works at least 40 hours per week. So, 40 is your benchmark with some exceptions:

  • Overtime doesn’t count: if you work 80 hours per week, you don’t count as two FTE. You’re still just one FTE.
  • Part-time hours do count, however. To figure your FTE for part-time workers, add up their average hours, and divide by 40. So, if you have five employees who each work 12 hours per week, that’s 60 hours. Those folks don’t count as five employees: they count as 1.5 FTE (60/40=1.5). 
  • To get your overall FTE, you would add your full-time FTE (that’s typically the easy part) to your part-time FTE.

Here’s a quick example: 

 Let’s say that you have four employees who work 40 hours or more, and the same five part-time employees as above. For PPP purposes, you don’t have nine employees: you have 5.5 FTE (four full-time FTE + 1.5 part-time FTE).

Got it?

If that math is too complicated, you can use fixed numbers of 1.0 for full-time employees and .5 for everyone else. However, if you opt for the simple version, you have to use it consistently throughout PPP (no mixing calculations).

If you reduce salaries or wages, but not hours, you may still have to reduce FTE. The quick and dirty rule is this: calculate the average annual salary or hourly wages during the covered period and divide it by the average annual salary or hourly wages of the look-back period. If that number is more than .75, there is no salary or hourly wage reduction. If it’s less, then you may need to reduce FTE (or see if you qualify for a safe harbor).

Why does all of this matter? It goes back to PPP loan forgiveness. If you reduce the number of FTEs during the covered period, your loan forgiveness piece will be reduced proportionately.

There are some exceptions to the reduction, as you’ve no doubt heard. Most notably, if you offer to rehire an employee (in writing) and the employee was fired for cause, turned your offer down completely, or asked for a reduction in hours, you may be able to exclude them in your calculations. As with all tax and financial matters, keep excellent records to support these positions.

There are also some safe harbors. If you weren’t allowed to operate because of COVID-19 related restrictions or if you were able to restore your FTE to pre-COVID levels by the end of the year, you may still qualify for forgiveness.

Since this part of my A to Z series, this post is meant to be a quick primer. It’s not intended to be exhaustive. Entire articles have been written on the calculations alone (not to mention the safe harbors), and that doesn’t even include the numerous changes and clarifications from Treasury… You get the point. If you have specific questions, be sure to check with your tax professional.

You can find the rest of the series here:


The Internal Revenue Service (IRS) has announced that it will begin opening its Taxpayer Assistance Centers (TACs) to the public in phases beginning today, Monday, June 29, 2020.

Those taxpayers seeking in-person assistance at a TAC will need to make an appointment. To do so, you. must call 1.844.545.5640.

Appointments will be available if people need assistance for authentication of identity and document validation related to tax return filing or application for an Individual Taxpayer Identification Number (ITIN); Sailing Clearances required for foreign travel by resident and non-resident aliens leaving the United States; assistance with Economic Impact Payment Issues; and cash payments. 

For an up-to-date listing of TAC locations as they open, click over to Contact Your Local IRS Office.

If you have questions that you hope to have answered over the phone, keep in mind that IRS live phone assistance remains limited. For Economic Impact Payment (EIP, or stimulus questions), call 800.919.9835 (that’s an automated number followed by a live person).

For other issues, please visit Let Us Help You on the IRS web site to find the phone number for the office best equipped to address your specific concerns.

Taxpayer asks:

My stimulus check is wrong. How can I fix it? I tried calling the IRS but couldn’t get anyone on the phone.

Taxgirl says:

The short answer is that you can’t immediately fix it. Even if you could get someone on the phone, the advice will be the same: you’ll have to wait. Specifically, the Internal Revenue Service (IRS) says on its website, “The IRS is not able to correct or issue additional payments at this time.”


There is some good news. You can fix it eventually. You will be able to claim the additional amount – either the missing $500 for a child or an adjustment because of your income – when you file your 2020 tax return in 2021. You’ll want to hang on to Notice 1444, Your Economic Impact Payment (you should receive it about two weeks after you receive your check) so that you’ll know how much to claim when it comes time to file.

(And yes, there has been some chatter about a fall fix, but so far, that’s not in the cards.)

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Lost your stimulus card? Tossed it in the trash?

I reported earlier that some taxpayers were mistaking their Economic Impact Payments, sometimes called stimulus checks, for trash – tossing cards and checks away.

Last week, the Internal Revenue Service (IRS) issued a reminder to taxpayers that some Economic Impact Payments, sometimes called stimulus checks, were being sent by prepaid debit card. Nearly 4 million people are being sent their Economic Impact Payment by prepaid debit card, instead of a paper check. The debit card will arrive in a plain envelope from “Money Network Cardholder Services.” The Visa V -2.3% name will appear on the front of the card; the back of the card has the name of the issuing bank, MetaBank®, N.A. The information included in the envelope will explain that the card is your Economic Impact Payment Card.

Paper checks will be sent in a marked envelope from the U.S. Treasury.

As of the date of my first story (May 27, 2020), the cost for a replacement card was listed on the fee schedule as $7.50 ($17 additional charge for priority shipment).

However, after the IRS announcement – and my story – the EIP prepaid debit website (eipcard.com) was quietly updated. As of May 29, 2020, the website states that the fee is “$0.00 for first reissued Card.” According to the new information:

If your Card is discarded or destroyed, it is important that you call Customer Service at 1.800.240.8100 (TTY: 1.800.241.9100) immediately and select the “Lost/Stolen” option.

Your Card will be deactivated to prevent anyone from using it and a new replacement Card will be ordered. Your first reissued Card will be free1 and then a $7.50 fee will be applied for each additional reissued Card. Please refer to the material in your Welcome Packet or see your Cardholder Agreement online at EIPCard.com for more information.

Neither MetaBank nor Treasury made much ado of the change. It might have gone unnoticed on my end, too, if Phyllis Jo Kubey, EA, had not pointed out the zero-fee. I checked the website and saw that the FAQs had been updated at several places to reflect the same change.

It’s a good reminder that things are changing at the speed of light these days. Keep checking in for the latest.

Feeling generous?

The COVID-19 pandemic has put millions of taxpayers out of work, putting a strain on charitable organizations. To provide some relief, as part of the CARES Act, Congress made a temporary – but important – change to the charitable giving laws.

Now, taxpayers can donate up to $300 in cash to qualifying charitable organizations and claim a charitable deduction – even if you don’t separately itemize deductions. In a post-Tax Cuts and Jobs Act (TCJA) world, about 85% of taxpayers claim the standard deduction, leaving those who give to charity without a deduction. Under the new law, for 2020, you can claim the standard deduction and still benefit from a charitable deduction.

Only cash or cash-equivalent gifts are eligible for the $300 deduction (no personal property, stocks, or art). Additionally, donations to donor-advised funds (DAFs) do not qualify.

And, of course, the regular rules regarding charitable giving still apply. You must donate to a qualifying charitable organization (no individuals, no matter how deserving), and you must keep good records.

Don’t toss out that mail just yet!

The Internal Revenue Service (IRS) is reminding taxpayers that some Economic Impact Payments, sometimes called stimulus checks, are being sent by prepaid debit card. The debit cards arrive in a plain envelope from “Money Network Cardholder Services.” 

No, that’s not a joke. As I reported earlier, nearly 4 million people are being sent their Economic Impact Payment by prepaid debit card, instead of a paper check.

According to the IRS, if you receive your stimulus check as a prepaid debit card, it will arrive in a plain envelope from “Money Network Cardholder Services.” The Visa V name will appear on the front of the card; the back of the card has the name of the issuing bank, MetaBank®, N.A. The information included in the envelope will explain that the card is your Economic Impact Payment Card.

In contrast, paper checks will be sent in a marked envelope from the U.S. Treasury.

The abrupt change from paper checks to debit cards is causing confusion for some folks (perhaps leading to today’s announcement). Earlier this week, Bonnie Moore and her husband, Thomas, received their stimulus check in the form of a debit card. Mistaking it for another junk mail credit card offer, Bonnie cut it up.

Her neighbor, Jay Bender, almost threw his out, too, commenting that printing on the envelope, “Doesn’t sound like the federal government to me.”

The prepaid debit card is intended to be convenient. According to the IRS, those who receive their stimulus check by prepaid debit card can do the following without any fees:

  • Make purchases online and at any retail location where Visa is accepted
  • Get cash from in-network ATMs
  • Transfer funds to their personal bank account
  • Check their card balance online, by mobile app or by phone

However, there is one fee not mentioned on the list. The cost for a replacement card? $7.50 ($17 additional charge for priority shipment). Bonnie Moore found that out the hard way.

So, use care when opening the mail.

Nearly four million debit cards are being sent out, with the first wave in mid-May. Currently, the IRS is not allowing folks to opt into (or out of) receiving their payment via prepaid debit card. 

How can you tell if you should expect a debit card? If there is a method to the IRS’ madness, they’re not sharing, stating merely that, “The determination of which taxpayers received a debit card was made by the Bureau of the Fiscal Service, a part of the Treasury Department that works with the IRS to handle distribution of the payments.”

The IRS encourages you to visit EIPcard.com for more information about prepaid debit cards.

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.

Taxpayer asks:

If I am on SSDI but I owe child support, will I still receive a stimulus check?

Taxgirl says:

Typically, certain Social Security benefits, including SSDI or SSI, are exempt from garnishment from most creditors. There are a few exceptions, and one of them is – you guessed it – the federal government. 

If you are collecting SSDI or Social Security retirement benefits, the federal government can garnish your benefits to recover back taxes or defaulted federal student loan payments. Your SSDI and Social Security retirement benefits can also be garnished for child support. Limits apply in those cases.

Here’s where it gets tricky. The CARES Act specifically says that Economic Impact Payments (EIPs or stimulus checks) can only be used as an offset for child support, and not for other obligations like back taxes or student loans. (You can read more about child support garnishes here.)

So, if you receive SSDI or Social Security retirement benefits, but you owe child support, the IRS may offset your check. That’s pretty clear.

Here’s where it’s less clear. If you receive SSI benefits, your SSI payment typically cannot be seized to satisfy existing obligations – including child support. However, your stimulus check is not considered an SSI benefit: it is a refundable tax credit. That means it should not fall under the exception. So while the IRS has not made an official comment on this issue, I believe the IRS will offset stimulus checks to SSI benefit recipients for child support. Readers have reported that to be the case, and that’s the logical conclusion – but this program, to date, hasn’t been very logical.

It’s worth noting that once the EIP payment has hit your bank account, it is no longer protected, and can be seized by creditors.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.