A few years ago, I was struck by how much income an individual could amass when that income wasn’t subject to income taxes. Non-taxable income is something to consider when you visit the Biltmore Estate in Ashville, NC. That family accumulated a massive fortune through shipping and railroads after starting a ferry service on Staten Island. Their fortune would be worth around $200 billion in today’s dollars … and none of it was subject to income tax! (read TurboTax vs H&R Block Online: Which One Is Better?)
Andrew Carnegie, who’s net worth would be approximately $310 billion in today’s dollars, paid very little in taxes as did John D. Rockefeller (net worth today of $340 billion). Taxes are the largest drain on any individual’s earnings today and even the most ardent supporter of income taxes (which were not legal in the original U.S. Constitution) take every tax deduction possible.
You and I, however, are not so fortunate to be able to start a business and avoid paying taxes, but there are still some sources of non-taxable income.
Sources of Non-Taxable Income
1. Life insurance payouts
The proceeds from a life insurance claim are generally not taxed. In some highly complex estates, that can change but for the vast majority of people, life insurance isn’t subject to income tax.
2. Municipal bond interest
Interested earned from municipal bonds 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. This tax exemption applies whether you invest in individual municipal bonds or purchase them through a municipal bond fund.
3. Disability insurance payments
As long as you paid the premiums for your disability insurance with AFTER TAX dollars, the proceeds you receive from a disability claim are non-taxable.
4. Worker’s compensation
If you sustained an injury at work, the benefits you receive are not taxable.
5. Disability benefits from a no-fault car insurance policy
These benefits kick in to compensate you for a loss of income or of earning capacity as a result of injuries sustained in a car accident. Make sure to check with your car insurance agent for specifics on this coverage.
Individuals can give up to a $13,000 to a person each year without the gift being taxable. For example, a mom and a dad could give each of their three kids $13,000 for a total of $78,000, and none of that gift would be taxable for either the parents or the children. Each child would receive $26,000 of non-taxable income.
If someone (out of their own generosity) decided to pay your tuition for school, that income is also non-taxable.
8. Medical expenses
The same rule applies for medical expenses as for tuition. If someone pays your medical bills, that income is also non-taxable.
9. Charitable gifts
The money you give to charity isn’t taxable income to that charity (provided the charity meets the provisions set by the IRS). Those funds, whiter were income to you, isn’t taxed anymore either.
10. Up to $3,000 of your income
Provided you have offsetting investment losses to equal that amount. The good news is that losses in excess of $3,000 can be carried over to the next tax year. If you lost $5,000 in investments last year (after selling those investments), you can deduct $3,000 from your taxable income this year and $2,000 next year.
11. Income in 9 states
If you earned income in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming, that income isn’t subject to state income tax (those states probably make it up in other ways though).
12. Income from the sale of your home
If you have owned your home for at least two of the last five years and lived in it as your primary residence for at least two of the last five years, when you sell that home you can exclude the proceeds from your income … up to $250,000 (for individuals) or $500,000 (for married couples filing jointly).
13. Contributions to a health savings account
For now, both employer and employee contributions are not subject to income tax.
14. Employer provided long-term care insurance
If your employer provides long-term care insurance or makes Archer MSA (a type of medical savings account) contributions on your behalf, that isn’t taxable income to you either.
For the vast majority of us, the bulk of all inheritance money is non-taxable. The estate tax (also called the “death tax”) doesn’t kick in until the estate value reaches $5 million and even then, the tax is computed only on amounts exceeding that limit.
Why is some income non-taxable?
Perhaps because individuals are stressed enough in the midst of a death or disability or perhaps because the government wants to encourage certain activities (such as investing in municipalities). At any rate, non-taxable income is a mini-blessing in most cases. I’ll take all I can get!
Are you aware of any other income that isn’t taxed?