Q No4:10 Sources Of Nontaxable Income / Other Sources

The Internal Revenue Service defines income as any money, property or services you receive - and Uncle Sam wants a bite of practically everything. The government says that all types of income are taxable unless specifically excluded by law. This article will describe a few of the more common categories of nontaxable income. Income That Isn't Taxed 1. D sab l t! Insurance "a!ments Usually, disability benefits are taxable if they come from a policy with premiums that were paid by your employers. owever, there are many other categories of disability benefits that are nontaxable. If you purchase supplemental disability insurance through your employer with after-tax dollars, any benefits you receive from that plan are not taxable. If you purchase a private disability insurance plan on your own with after-tax dollars, any benefits you receive from that plan are not taxable. !or"ers# compensation $the pay you receive when you are unable to wor" because of a wor"-related in%ury& is another type of disability benefit that is not taxable. 'ompensatory $but not punitive& damages for physical in%ury or physical sic"ness, compensation for the permanent loss or loss of use of a part or function of your body, and compensation for your permanent disfigurement are not taxable. (isability benefits from a public welfare fund are not taxable. (isability benefits under a no-fault car insurance policy for loss of income or earning capacity as a result of in%uries are also not taxable #. $m%lo!er&"ro' ded Insurance The IRS says that )generally, the value of accident or health plan coverage provided to you by your employer is not included in your income.) This could be health insurance provided through your employer by a third party $li"e *etna or +lue 'ross& or coverage and reimbursements for medical care provided through a health reimbursement arrangement $ R*&. ,urthermore, employer and employee contributions to a health savings account are not taxable. -mployer-provided long-term care insurance and *rcher .S* contributions $a type of medical savings account& are also not taxable. (. ) ft ) ' n* of +%&to ,1(-000. ) ft /ece %t of 0n! 0mount /ust as the IRS defines all income as taxable, except that which is specifically excluded by law, it defines all gifts as taxable, except those specifically excluded by law. Than"fully, there are many gifts that aren#t taxable, and any tax due is always paid by the gift-giver, not the recipient. $0ote that a pri1e is not the same as a gift. Read Winning The Jackpot: Dream Or Financial Nightmare? to learn more.& 2erhaps the most well-"nown exclusion is that individuals can gift up to a certain amount per donor per year without the gift being taxable. ,or example, each member of a married couple could give each of their three children 345,666 in 7646 and 7644. The parents would gift a total of 389,666, and none of that gift would be taxable for either the parents or the children. -ach child would receive 37:,666 of nontaxable income. The following types of income are also considered nontaxable gifts;

Tuition or medical expenses paid on someone else#s behalf

2olitical donations <ifts to charities $charitable donations& - in fact, these are tax-deductible, meaning that they reduce your taxable income by the amount of the donation. $=earn more in It Is Better To Give AND Receive.&

*n important exception to this rule is gifts from employers. These gifts are usually considered fringe benefits, not gifts, and are taxable. * small gift worth less than 37>, such as a holiday fruitca"e, is an exception to the fringe benefit rule. $?ou might want to chec" out Top !state "lanning #istakes.& To prevent tax evasion, the IRS also says that the gift tax applies )whether the donor intends the transfer to be a gift or not.) ,or example, if you sell something at less than its mar"et value, the IRS may consider it a gift. *n accountant can provide you with taxplanning advice to help you avoid triggering the gift tax and let you "now when you should file IRS form 86@, United States <ift $and <eneration-S"ipping Transfer& Tax Return. 4. 1 fe Insurance "a!outs If a loved one dies and leaves you a large life insurance benefit, this income is generally not taxable. owever, be aware that there are some exceptions to this rule in more complex situations. IRS publication >7>; Taxable and 0ontaxable income, describes these exceptions.
More than 50% of retirement age individuals to not have enough savings

2. Sale of "r nc %al /es dence Individuals and married couples who meet the IRS#s ownership and use tests, meaning that they have owned their home for at least two of the last five years and have lived in it as a principal residence for at least two of the last five years, can exclude from their income up to 37>6,666 $for individuals& or 3>66,666 $for married couples filing %ointly& of capital gains from the sale of the home. 3. +% to ,(-000 of Income Offset b! 4a% tal 1osses If you sell investments at a loss, you can use your loss to reduce your taxable income by up to 35,666 a year. 'apital losses can even be carried over from year to year until the entire loss has been offset. ,or example, if you sold investments at a loss of 3A,>66 in 7644, you could subtract 35,666 from your taxable income on your 7644 tax return and 34,>66 from your income on your 7647 tax return. 5. Income $arned n N ne States Under the U.S.#s federalist system, each state is able to ma"e many of its own laws. So even though most income is taxable at the federal level, and most states also levy a state tax on income, nine states - *las"a, ,lorida, 0evada, 0ew ampshire, South (a"ota, Tennessee, Texas, !ashington and !yoming $as of 766@& - have chosen to not levy a state income tax on their residents. This tax brea" encourages people to vote with their feet and move to these states where they will be able to "eep more of their income. $!hich states are tax-effective retirement localesB It depends on the source of your retirement income, read Fin$ing A Retirement%Frien$l& 'tate.& 6. 4or%orate Income $arned In 7 'e States Some states also encourage corporations to locate there by not taxing corporate income. There are no corporate taxes in 0evada, South (a"ota, Texas, !ashington and !yoming. This tax brea" can encourage businesses to locate in these states, which in turn can help improve the overall economic climate in these states.

8. Inher tance The estate tax, also "nown as the death tax, seems to always be in flux. This tax tends to unfairly penali1e the beneficiaries of the wealthy, as estates with values of up to a couple million are usually exempt from the estate tax. ere are the estate tax levels from 766> to 7644; 0mount $xem%t from $state $state Tax Tax /ate on 0mount $xceed n* $xem%t on 766> 34.> million A8 C 766: 37 million A: C 7668 37 million A: C 7669 37 million A: C 766@ 35.> million A> C 7646 unlimited 5> C 7644 3> million 5>C !hile the estate tax technically falls on the estate, it really affects the beneficiaries of the estate. +ut if you are the beneficiary of an estate that falls into the exempt category, you#ll get all that income, tax free. *nd if you inherit an estate worth more than the exemption, you#ll still get the exempt amount tax free. 10. :un c %al ;ond Interest .ost of the time, when you invest in bonds, you have to pay federal, state andDor local tax on the yield you earn. owever, when you earn money from municipal bonds, the proceeds are usually tax-free at the federal level and also tax-free at the state level if you live in the same state the bonds were issued in. This tax exemption applies whether you invest in individual municipal bonds or purchase them through a municipal bond fund. *lthough municipal bonds generally offer a lower rate of return than other types of bonds, when you consider their after-tax return, you may end up ahead by investing in municipal bonds. .unicipal bonds are generally recommended only for higher-income individuals and married couples who fall into the 79-5>C federal income-tax brac"ets. $Investing in these bonds may offer a tax-free income stream but they are not without ris"s, see The Basics O( #)nicipal Bon$s.& 4onclus on: 0rb trar! Taxat on Taxes discourage all activities that are taxed, so why has the IRS chosen to exempt these and a few other sources of income when it generally tries to tax everythingB The answer to this Euestion varies, depending on your political views, but for whatever reason, the government has decided to eliminate or dramatically reduce taxes in certain areas to encourage certain activities that it thin"s will benefit the country, such as home ownership and investment, and reduce the ris"s associated with these activities. !hy the government taxes the income you earn at wor", but not life insurance, is anyone#s guess. 9ear