Yes, you read that correctly – there are some forms of income you can receive that may actually be tax-free. Following is a list of thirteen common sources of tax-free income.
- Gifts. Gifts you receive are not taxable income to you. In fact, they are not subject to gift tax to the person giving the gift as long as the gifts received in one year from one person do not exceed $14,000.
“Even gifts over $14,000 might not be taxable, but they do start using up the lifetime exclusion of the donor,” adds Associate Partner Julie Strohlein, CPA. “Currently, a donor can give total lifetime gifts of up to $5,490,000 without paying any gift tax.”
Manager Chris Cicalese, CPA, MSTFP notes that “If the gifts are coming from your parents or various owners, they each are entitled to the annual exclusion amount on the gift. In the example of two parents they can give up to $28,000. Accepting a prize or award should not be confused as a gift and generally is picked up as taxable income at the fair market value of the prize or award.”
- Rental Income. If you rent your home or vacation cottage for up to 14 days, that rental income does not need to be reported. Homeowners often can earn some tax-free income by renting out a home while a large sporting event (Superbowl or a golf event) is in town.
- Child’s Income. Up to the standard deduction amount ($6,350 in 2017) in earned income (wages) and $1,050 in unearned income (interest) for children is not taxed. Excess earnings above these amounts could be taxed and $2,100 in unearned income is taxed at the parent’s higher tax rate.
- Inheritance. In most states, beneficiaries typically do not pay tax on the value of what they inherit. When inherited property is sold by the beneficiary, however, there may be a capital gains tax obligation. Note that New Jersey and Pennsylvania currently have an Inheritance Tax.
- Roth IRA Earnings. As long as you meet this retirement account type’s rules, earnings in a Roth IRA are not taxed. Can a taxpayer convert a traditional IRA to a Roth IRA? Yes, says Julie Strohlein: “Tax would be paid in the year of the conversion, but all withdrawals would be tax-free after a five-year waiting period, including all the growth after the conversion.”
- Life Insurance Received. The full value of life insurance received is not taxable income. However, the proceeds may be taxable within the estate of the deceased policy holder.
- Child Support Revenue. Income you receive as child support is not deemed to be taxable income. On the other hand alimony received is taxable income.
- Home Sales Gains. Up to $250,000 ($500,000 for married filing jointly) in gains on the sale of a qualified principal residence is not taxable. However, explains Julie, “the sellers must have lived in the home for at least two out of the five years prior to the sale.”
- Scholarships/Fellowships. Money received to cover tuition, fees, and books for degree candidates is not generally taxable.
- Refunds. Federal refunds (technically you’ve already accounted for this income) and most state refunds for non-itemizers are also tax-free.
- Bond Interest. Per Julie, “Interest earned on municipal bonds is federally tax-exempt and may be state tax-exempt as well if the bonds are issued by a government agency within the taxpayer’s home state.”
- Compensation from Loss or Injury. Associate Partner Mike Engleman, CPA points out that “damages received for personal physical injuries or sickness are also generally not taxable.”
- Social Security Benefits. Alloy Silverstein’s CPAs and advisors also work with many clients when it comes to planning their social security income.
Per Mike, “A portion of your social security benefits are not taxable depending upon your other income.” Consult your CPA to discuss your specific situation when it comes to social security benefits.
This is by no means a complete list of tax-free income, but it’s nice to know that some areas of tax law still benefit taxpayers. If your tax situation is impacted by one of these scenarios, it should prompt a conversation with your South Jersey CPA and tax expert.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.
