Not all income is taxable, according to the IRS. The taxability of income depends on specific rules, requirements, and regulations. Here are several categories of income that are generally not subject to tax:
Life Insurance Proceeds
When a beneficiary receives life insurance proceeds after the policyholder’s death, these funds are typically tax-free. However, any interest earned on the proceeds may be taxable. If the policyholder surrenders the policy for cash, the tax implications can become more complex. Additionally, loans taken against a life insurance policy are usually not taxable as long as the policy remains active and the loan doesn’t exceed the premiums paid.
Long-Term Care Insurance Payments
Long-term care insurance payments are generally not taxable. If you receive reimbursements for medical expenses related to illness or injury under an accident or health insurance policy, these payments are typically considered nontaxable by the IRS.
Disability Benefits
Most disability payments, including worker’s compensation, are exempt from taxes. This also applies to Supplemental Security Income (SSI) payments. Additionally, disability pensions or compensation received from the Department of Veterans Affairs by U.S. military veterans are tax-free.
Municipal Bond Interest
Interest from municipal bonds issued by state and local governments is generally exempt from federal income tax. However, some types of municipal bond interest may be taxable at the state or federal levels. For instance, U.S. Treasury securities are taxable at the federal level, and corporate bond interest is taxable at both federal and state levels.
Capital Gains and Losses
If your capital losses exceed your capital gains in a given year, you can claim up to $3,000 in excess losses as a deduction from your income ($1,500 if filing separately). This can be reported on Schedule D of your Form 1040. Any unused losses can be carried forward to future years. Additionally, if you meet certain conditions, you can avoid paying capital gains tax on the first $250,000 in profits from the sale of your primary residence (up to $500,000 for married couples filing jointly).
Roth Account Income
Distributions from a Roth IRA are tax-free if the account has been open for at least five years and the account holder is over the age of 59½. The IRS also allows contributions to Roth IRAs at any age. Furthermore, you can keep funds in your Roth IRA for the rest of your life without being required to take distributions.
Alimony and Child Support
For separation or divorce agreements made on or after January 1, 2019, alimony payments are not considered taxable income for the recipient. Conversely, if you are paying alimony under such an agreement, you cannot deduct the payments from your taxes. Additionally, child support payments are not taxable.
Understanding which types of income are taxable can help you better manage your finances and avoid any surprises when tax season comes around. Always consult with a tax professional to ensure you are taking advantage of any tax-free income opportunities that may apply to you.
