Tax free income!
As a general rule, all income you receive in the form of money, property, or services is taxable and must be reported on your tax return unless specifically excluded by the law. Even though it feels like everything is taxable, below are a few examples of what you can put in your pocket and not be taxed on!
1. Real estate
Sale of primary residence (Home exclusion)
You can exclude up to $250,000 (single) or $500,000 (married) of the gain on the sale of your home if 1/ you owned the home for at least 2 years during the 5-year period ending on the date of sale, 2/ you used the home as a principal residence for at least 2 years during the 5-year period ending on the date of sale, and 3/ you did not exclude a gain from the sale of another home during the 2-year period ending on the date of sale.
Sale of investment real estate
When you sell real estate that you owned at least one year, the first $39K (single taxpayer) or $78K (married filing jointly taxpayer) is tax free (long term capital gain).
Rental income received for a rental period shorter than 14 days in the year is tax free.
To know more about real estate: https://www.kbfinancials.biz/real-estate-taxation.html
Social security income
If Social Security is your only source of income, then it is generally tax-free. If you have other sources of income in addition to Social Security, some of your Social Security benefits may be taxed. Here is how it works:
• None of your social security benefits are included in income if the provisional income doesn't exceed a threshold. Provisional income is the taxpayer's modified adjusted gross income plus half of the social security benefits received during the taxable year.
• If provisional income exceeds the base amount then up to 50% of the social security benefits will be taxable. The base amount is $25,000 for single, head of household, qualifying widower, and married filing separate and $32,000 if married filing jointly.
• If your provisional income exceeds the adjusted base amount, then up to 85% of the social security benefits will be taxable. The adjusted base amount is $34,000 for single, head of household, qualifying widower, and married filing separate and $44,000 if married filing jointly.
The good news is 15% of your Social Security benefits will always be tax-free!
Roth IRA income
Roth IRA withdrawals are tax-free if you meet the withdrawal requirements. A Roth IRA is an individual retirement arrangement where contributions cannot be deducted but qualified distributions are tax-free. Qualified distributions are tax free if you held the Roth IRA for 5 years and the distribution is due to either reaching 59½, death or disability or a first time home purchase.
To know more about retirement accounts: https://www.kbfinancials.biz/save-for-retirement.html
3. Health & Education
Coverdell / ESA Accounts
The distributions these your education accounts are tax free if they are used to pay for tuition and books.
A scholarship paid to you to aid in the pursuit of your studies is tax free if you are a degree candidate at an eligible educational institution and you use the funds to pay qualified education expenses such as tuition & fees.
The distribution from those accounts are tax free if they are used to pay for medical costs.
To know more about Health tax deductions: https://www.kbfinancials.biz/your-health-costs-and-your-taxes.html
4. Investment income
Sale of stock / shares
Capital gain on shares held for more than one year is tax free up to the first $39K (single taxpayer) or $78K (married filing jointly taxpayer).
Interest on municipal bonds
Interest on a municipal bond used to finance government operations is generally not taxable if the bond is issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions such as port authorities, toll road commissions, utility services authorities, community redevelopment agencies, or qualified volunteer fire departments.
5. Gift & Inheritance
Gifts received from relative and inheritance monies received from an estate are tax free. In addition, holiday gift from you employer is also tax free if it is not in cash and has a low market value (de minimis benefit).
Generally, if you receive the proceeds under a life insurance contract as a beneficiary due to the death of the insured person, the benefits are not included in gross income and do not have to be reported. Alternatively, if you cash in your life insurance policy, the part of the cash value that exceeds the total premiums you paid will be considered a taxable gain.
6. Damages & support
Amounts received as compensation for physical injury or sickness are not taxable. These amounts include any awards received for loss of wages or earnings, loss of earning capacity, and for impairment, medical bills, etc. The method of how the funds are received does not play a role: the money can be the result of a court awarded verdict or an out-of-court settlement. Payments for injuries such as harassment, discrimination, libel, slander, wrongful termination and invasion of privacy are taxable as they are non-physical personal injuries. Punitive damages are also taxable even if they are related to physical injuries which were not taxable
If you're injured on the job, you get compensation for workplace injuries or illness without having to sue. Your benefits help make up for the income you lose while you're out injured. Amounts you receive as workers' compensation are fully exempt from tax if they are paid under a workers' compensation act. The exemption also applies to your survivors.
A payment that is specifically designated as child support or treated as child support under your divorce or separation instrument is not taxable to the payee and is not deductible by the payer.
Military disability retirement pay received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces are excluded from taxable income. This is a personal injury or sickness that resulted directly from armed conflict, took place while you were engaged in extra-hazardous service, training exercises such as maneuvers, or was caused by an instrumentality of war.
Governmental benefits from a public welfare fund based upon need such as payments due to blindness are not included in taxable income.
As always in tax law, there are exception to the general rules, so make sure you contact your tax professional Karine Bauer, EA for tax answers specific to your tax situation. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional. Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.
Bear in mind the date of this article as tax laws evolve over time.
Updated on : February 9th, 2020