SOURCES OF NON-TAXABLE INCOME
Corporate Income Generated in Five States. Certain states encourage companies to conduct their business in those places by not taxing corporate income. Nevada, South Dakota, Texas, Washington, and Wyoming levy no corporate taxes. It enables firms to operate in these states, helping to improve the overall economic condition in the above-mentioned states.
Disability Insurance Payments. The said payments are normally taxable if coming from a policy with premiums, which were given by employers. However, some other classifications of such benefits are nontaxable.
- Any benefits from a supplemental disability insurance bought through an employer with post-tax dollars
- Any benefits from a private disability insurance plan purchased all by yourself with after-tax dollars
- Compensatory, but not punitive, damages for physical injury or physical sickness; permanent loss or loss of any body part; and permanent disfigurement
- Disability benefits from a no-fault car insurance policy for loss of earning capacity or income due to injuries
- Disability benefits from a public welfare fund
- Employees’ compensation received because an individual cannot work due to work-related injury
Employer-Provided Insurance. The worth of an accident or health plan coverage, provided by an employer, is excluded from one’s income. Some examples of employer-provided insurance include health insurance through an employer by a third party such as Aetna or Blue Cross, or coverage and reimbursements for medical care via health reimbursement arrangement. It also encompasses contributions on a health savings account, Archer MSA contributions, and employer-provided long-term care insurance.
Gift-Giving of Up to $13,000, Any Amount of Gift Receipt. Gifts are also taxable, according to IRA, except those income that are not taxable by law. Many gifts are nontaxable, and the gift giver always pay any tax that is due. One of the most common tax exclusions is an individual can gift up to a specific amount per donor every year without imposing tax on that. The following are nontaxable, too: charitable donations, political donations, tuition or medical expenses paid on behalf of another person, and gifts from employers.
Income in Nine States. Under the federalist system, every state has the capacity to make majority of its laws. Although most income is taxable at the federal level, and most states impose state tax on income, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming decided not to tax the income of their residents. It encourages people to reside in these states without income tax to save more of their income.
Inheritance. Estate tax (or death tax) appears to always changing, which tends to unfairly penalize the inheritors of the wealthy since estates with up to a couple million are typically exempt from this. As of 2014, the amount of estate tax exemption is $5,340,000. Technically speaking, the estate tax belongs to the estate. If you are a beneficiary, and the estate falls into the exempt category, you will obtain all that income tax-free. But if the estate is higher than the exempt level, you will still attain the exempt amount tax for free.
Life Insurance Payouts. Income from this payout is generally not taxable if a loved one passes away and leaves a huge life insurance benefit. But there are certain exemptions in more complicated situations, as outlined in the IRS publication 525: Taxable and Nontaxable income.
Municipal Bond Interest. You need to pay local, state, and/or federal tax on the yield you earn when investing in bonds. But proceeds from municipal bonds are usually tax-free at the federal level, and at the state level if the holder lives in the same state where the bonds are issued in. This is applicable to municipal bonds invested or purchased through a municipal bond fund. Such bonds have lower rate of return than other bonds. But upon considering its after-tax return, holders may end up ahead by investing in these derivatives.
Sale of Principal Residence. Individuals and married couples can exclude up to $250,000 (individuals) from their income or $500,000 (married couples filing jointly) of capital gains from the sale of their house if they met complied with the ownership and use examinations of IRS. It means they have owned their house for at least two of the past five years and resided in it as their main residence for at least two of the past five years.
Up to $3,000 of Income Offset by Capital Losses. An investor can use their loss to cut their income by up to $3,000 annually if they sell their investments at a loss. Such losses can be transferred from year to year until the individual has been able to offset those.
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