What is Tax-Free Income?
“Little by little does the trick.” -Aesop
Whether you work for a paycheck or collect Social Security benefits, there are many sources of income available to you that are completely tax-free. Little by little, they can add up to a lot more money in your pocket.
This page contains updated information about many forms of tax-free income available to the average taxpayer. And it’s all legal; tax law does not allow the IRS to tax the income and benefits discussed in the following sections:
Here are the types of income which cannot be taxed:
Please note that the above list is not definitive or all-inclusive. There are other forms of tax-free income listed below.
In general, property you receive as a gift, bequest, or inheritance is not included in your gross income. However, if property you received in this manner later produces income (such as interest, dividends, or rents), that income is taxable. If property is given to a trust and income from it is paid, credited, or distributed to you, that income is taxable.
An inheritance is not reported on your income tax return, but a distribution from an inherited pension or annuity is, and is subject to the same tax as the original owner would have had to pay.
You don’t include the value of meals and lodging provided to you and your family by your employer if the following conditions are met:
In addition, the amount that qualifies as a de minimis fringe benefit is nontaxable.
In general, you must report income in any amount you receive for sickness and injury payments through a health or accident plan that is paid for by your employer. If you and your employer pay for the plan, only the amount you receive that is due to your employer’s payments is reported as income. However, certain payments may not be taxable to you.
Any amount paid to reimburse you for medical expenses you incurred after the plan was established is generally non-taxable income. If you pay the entire cost of a health or accident plan,don’t include any amounts you receive from the plan for sickness or personal injury as income. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement.
In most cases, if you are covered by a health or accident insurance plan through a cafeteria plan, and the amount of the insurance premiums was not included in your income, you’re not considered to have paid the premiums and you must include any benefits you receive in your income. However, if the amount of the premiums was included in your income, you are considered to have paid the premiums and any benefits you receive are non-taxable.
Here are several options for tax-free income which may be provided by your employer:
Education Payments
Your employer can provide up to $5,250 per year in educational aid when you take undergraduate or graduate courses. Best of all, the school courses don’t have to be job-related (your employer might not like it, but the IRS does not care). This is essentially a tax-free pay raise.
Learn about more tax benefits for education.
Public Transportation Payments
With gas prices so high, have you considered using public transportation to get to work … and saving while doing it? Your employer can purchase public transportation fare tickets, passes, or tokens for you to get to and from work. For Tax Year 2018, up to $260 per month may be provided to you tax-free.
If you drive to work and pay a fee for parking, your employer can reimburse you up to $260 per month tax free for Tax Year 2018.
With gas prices so high, it may be time to consider starting a carpool. As the operator of your own car, any money your passengers pay you for gas or expenses is tax-free income. Generally, if you travel alone you cannot deduct commuting expenses like gas. However, reimbursements from your carpoolers which are used to cover gas, repairs, and other car operating costs are not taxable income. Note that this particular form of tax-free income is paid to you by your passengers and not your employer.
Health Insurance Premium Payments
If you are not insured through your employer and your HMO insurance premium is $3,360, or $280 a month, your actual cost is much more than that. For this premium, the real cost would be $4,480 (Premium: $3,360 plus $1,120 income tax) per year (25% tax bracket). If you are insured through your employer, both of you will achieve the same benefit. Your income increases and the employer pays less in salary, since the insurance payments are fully deductible. In addition, the payroll taxes on insurance premiums do not apply.
Term Life Insurance Payments
Your employer can pay your premiums for term life insurance coverage of up to $50,000. You, the employee, can select a beneficiary of your choice. The employer can deduct the expense and you will have additional tax-free income.
Any veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA) are generally non-taxable. These benefits include, but are not limited to:
Payments you receive as worker’s compensation for an occupational sickness or injury are fully tax-exempt if they are paid under a workers’ compensation act or statute. The exemption also applies to payments made to your survivors. However, the exemption doesn’t 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.
If part of your workers’ compensation reduces your Social Security or equivalent railroad retirement benefits received, that part is considered Social Security (or equivalent railroad retirement) benefits and may be taxable.
Still not sure if you need to file a tax return? Use our Free FILEucator tax tool to find out if you are required to (or want to) file a return!
Estimate Your Tax Return with Our FREE 2018 Tax Calculator
Start Using Our Free 2018 Tax Calculator
Research & References of What is Tax-Free Income?|A&C Accounting And Tax Services
Source
0 Comments
Trackbacks/Pingbacks