The money you earn from working or through investments is generally subject to federal income tax and, in some instances, state income tax. No one likes to pay taxes, but most of us understand that it is a necessary inconvenience. The government uses the money earned through taxes for the betterment of society, so at least it’s being put to good use!
For others, taxes can be an enormous financial burden, especially if they’re already struggling to make ends meet due to specific or unavoidable circumstances in life. Luckily, the government provides relief for disadvantaged individuals by designating certain categories of earnings as non-taxable. Here are 16 types of tax-free income.
Accelerated Death Benefits
When you get life insurance, you gain a rider for living benefits coverage, including accelerated death benefits. Suppose you’re diagnosed with a terminal or critical illness that has been certified by a physician, and you have this specific provision in your life insurance policy. In that case, you get a non-taxable cash advance up to the limit as a living benefit. However, it should be noted that the death benefits gained while alive reduce the death benefit that your beneficiary gets upon your passing.
Disability Insurance Payments
If you have an employer-provided policy, disability benefits received as a result are taxable. But some categories are non-taxable:
- Benefits from supplemental disability insurance purchased through your employer with your after-tax dollars.
- Worker’s compensation payments.
- Benefits received from a private disability insurance plan purchased with after-tax dollars.
- Disability benefits from a public welfare fund.
- Compensatory damages for physical sickness or injury, loss of a part/function of the body, and permanent disfigurement.
- Disability benefits that fall under a no-fault car insurance policy for any loss of income or earning ability due to injuries.
Disaster Relief Assistance
If you’re a victim of a natural disaster and qualify for relief assistance or other forms of compensation, they’re usually non-taxable income. You can typically exclude money you get from the government to pay for funerals, personal expenses, property replacements, and home repairs that the insurance doesn’t cover.
Inheritance
An inheritance obtained upon someone’s passing is usually tax-free if it is below a stipulated limit per the tax year. On the federal level, inheritance is always tax-free for the recipient.
Certain states have estate taxes on assets, while other states have inheritance taxes on asset transfers. For example, New Jersey, Iowa, Pennsylvania, and Kentucky have inheritance taxes. Massachusetts, Hawaii, New York, Washington, and Connecticut, among many others, require property owners to pay estate taxes. The only state that has both estate and inheritance taxes is Maryland.
Child Support
If you get child support payments, these are non-taxable income and cannot be included when you file your taxes.
Employer Assistance
There are some ways your employer can give financial assistance that falls under non-taxable income. For example, you can get an adoption credit if your employer offers adoption assistance, but the amount would depend on your modified adjusted gross income and if you’ve claimed qualified adoption expense credits previously.
Likewise, if your employer has established an education assistance program, you can qualify for up to $5,250 annually in benefits, which will not be taxed as income.
Accident and Health Plans Provided by The Employer
There are some employer-provided accident and health plans that are non-taxable income. Contributions to a long-term health plan are non-taxable, and employer contributions to a health spending account are non-taxable. Similarly, the growth in an HSA is non-taxable, and you can invest funds in an HSA when it reaches a specific balance. The gains in these accounts are tax-free at the federal level. They include:
- Illness And Injury Benefits
- Some types of illnesses and injuries that are non-taxable are:
- Disability insurance payments, if made with after-tax dollars or paid for by your employer.
- Black lung benefits.
- Federal Employees’ Compensation Act benefits.
- Compensation for injuries sustained on the job under the Railroad Unemployment Insurance Act.
- Medical settlements and personal injury protection payouts under your car insurance policy.
Foster Care Payments
Foster parents responsible for caring for children placed in their homes can receive government payments to help with their expenses, which are generally considered non-taxable income.
Energy Conservation Subsidies
Some public utility companies offer subsidies in the form of rebates when you replace old appliances with energy-efficient ones. For instance, if you have upgraded the air conditioning system in your home and got a rebate from your electric company as a reward for your energy-efficient effort, this is tax-free income.
Employer-Provided Group Term Life Insurance
Most employers offer group benefits as part of their compensation package. The first $50,000 in life insurance is considered non-taxable income to the employee. Any amount above that can be considered income based on the cost of coverage.
Interest from Municipal Bonds
The interest income on bonds is taxable at the state and federal level. However, municipal bonds issued by the federal government or state entities are an exception since these bonds are utilized for public infrastructure funding, financing, and repairs. If you own municipal bonds issued in your state, the generated interest income is non-taxable.
Financial Gifts
Monetary gifts, such as any cash or asset gifts from family, friends, or employers, are non-taxable. If any federal tax is owed, then the giver is responsible for that.
Life Insurance Death Benefit
If you happen to be listed as a beneficiary on a life insurance policy, the death benefit proceeds are considered non-taxable income. However, the interest acquired on life insurance proceeds is taxable.
Some Withdrawals from a Roth IRA
You can withdraw your Roth IRA contributions whenever you want without owing any taxes, regardless of how long your account has been open. The tax-free portion applies to the money you have put in yourself, not the gains on that money. This is because contributions to Roth IRAs typically come from earnings that have already been taxed.
Sale Of a Principal Residence
If you sell your house for a profit, you can exclude up to $250,000 as a single filer or $500,000 as a married joint filer from taxation. To qualify, you must own your home and have used it as your primary residence for at least two years in the past five years.
