Any employee or business owner knows that a majority of your income is taxed. Whether you are paid hourly, salary or commissions, you still pay taxes for that income. However, there may be exceptions to the rule.
Seven types of income that can’t be taxed
There are some forms of income that do not fall under ‘taxable income’ in the IRS, including:
- Interest in Municipal Bonds – most adults are familiar with municipal bonds and their tax advantages. However, there is also another advantage where the interest earned is exempted from federal taxes.
- Gifts – if you receive money from a family member or a friend, you don’t pay taxes on that income. If the giver exceeds over $15,000, they may pay a gift tax, but the received does not.
- Inheritances – If you receive an inheritance from a relative or friend, you won’t pay federal taxes on it because the estate pays all the taxes before you receive the inheritance.
- Carpool reimbursements – If you lead a local carpool to work, any funds you receive from other co-workers or passengers are excluded from your income tax.
- Profits from selling a home – It is surprising to most sellers, but the additional income you make selling your home may not be taxable income for the IRS. The house has to be your principal residence for two out of the last five tax years, and then you can exclude up to $500,000 if you’re married.
- Workers’ Compensation – Most government benefits, like workers’ compensation and veteran benefits, will be exempted from income tax.
- Gambling Income (to an extent) – The government won’t tax gambling winnings as income if your losses exceed your winnings in the tax year. If you win big and exceed your losses, then it becomes taxable.
These are only some of the exceptions. More exceptions are depending on your lifestyle and what government programs you participate in, so work with a professional to learn more about your options before the next tax season.