As you probably know, most of your income is subject to the IRS. Whether it's a salary, tips, commissions, hourly income, investment returns, and property rentals, Uncle Sam expects his share.
Surprisingly, bartering is not exempt. For example, swapping haircuts for lawn care requires the payment of taxes based on the value of the obtained service.
Even morally questionable profits, such as embezzled funds, are not exempt. The IRS stated unequivocally that income from illegal actions such as embezzlement and kickbacks is taxable.
Is there any relief for income-earning taxpayers? Indeed, there are different types of tax-free income. Here are 16 types of income that the IRS can't touch.
Veterans’ Payments
Compensation provided to veterans and their families remains exempt from taxation. This includes:
- Allowances for education, training, and sustenance
- Housing grants for the disabled
- Disability compensation and disability pension payments
- Vehicle grants for veterans with visual or mobility disabilities
- Insurance payouts and dividends for veterans and beneficiaries
- Interest earned on insurance dividends is kept with the Veterans Administration
- Assistance from dependent-care programs
- Payments made under the program of paid work therapy
- Survivor benefits for Armed Forces members who served after September 10, 2001
- State or local bonuses for service in a combat zone.
Inheritances
Receiving an inheritance from a deceased person, whether a friend, relative, or acquaintance, doesn't incur federal tax obligations. This is because the deceased's estate will pay any outstanding taxes before you receive the inheritance. The estate tax is calculated based on the taxable estate's value. It's worth mentioning that some states have inheritance taxes, so double-check.
Welfare Payments
Payments from welfare programs such as SNAP or TANF are not subject to taxation by the IRS. This applies to financial assistance for low-income individuals and families, ensuring these funds are available for their intended purpose.
Supplemental Security Income
Supplemental Security Income (SSI) is a US government program that provides monthly assistance to low-income people aged 65 or older, blind or disabled. SSI, which the Social Security Administration administers, is funded by the United States Treasury rather than the Social Security trust fund, and its payments are not subject to taxation.
Gifts
When you receive a monetary gift from a relative or friend, you're not required to pay taxes on that amount. If the gift exceeds $17,000 in 2023, the giver might have gift tax obligations, but you, as the recipient, do not.
Municipal Bond Interest
Interest generated on certain municipal bonds issued by governmental entities to fund operations is typically tax-free. Depending on your residency in the issuing location, these bonds may also be free from state and local taxes, giving you double- or even triple-exempt status.
Disability Benefits
Generally, disability benefits received through Social Security Disability Insurance (SSDI) or specific employer-sponsored disability plans are not subject to IRS collection.
Life Insurance Death Benefits
Life insurance death benefits are funds given to beneficiaries upon the policyholder's death. These grants, which are generally non-taxable, provide financial assistance without being considered taxable income, ensuring that beneficiaries do not owe taxes on the amount received.
Scholarships and Grants
Scholarships and grants used for qualified educational expenses are generally untaxed income and are not subject to IRS collection.
Child Support Payments
Child support payments are not subject to taxation. Child support is "tax-neutral" because it covers the child's expenses. These payments are equivalent to direct spending on behalf of the child if you are the Payor. Although you are paying your ex-spouse for child-related costs, these payments are considered personal for tax purposes and are not deductible.
Foster Care Payments
Foster parents who receive payments from child placement agencies or government entities aren't subject to income taxes.
Worker's Compensation
If you're granted workers' compensation due to a work-related illness or injury, the payments are tax-free as long as they are paid under a workers' compensation law.
Casualty Insurance
If you file an insurance claim due to a house fire or a car accident, the payments you receive from casualty insurance are exempt from taxes unless they exceed your actual incurred loss.
State Crime Victims Compensation
State Crime Victims' Compensation programs provide financial assistance to individuals who have been victims of violent crimes. These programs aim to help victims cover expenses such as medical treatment, counseling, lost wages, and other costs incurred due to the crime. Payments from state crime victims' compensation programs are generally regarded as untaxed income.
Disaster Relief Grants
Disaster Relief Grants are financial assistance provided to individuals, communities, or organizations affected by natural disasters, catastrophes, or significant crises. The Disaster Relief and Emergency Assistance Act states that if you get post-disaster aid grant payments and use them to cover essential expenses such as dental, medical, housing, personal possessions, transportation, or burial costs, this income is not subject to taxation.
Black Lung Benefits Payments
Black Lung Disease Benefits are financial assistance provided to coal miners and their families who have suffered pneumoconiosis, often known as black lung disease, due to prolonged coal dust exposure. These benefits aim to help with medical costs, lost wages, and other financial problems caused by the disease. Federal black lung benefit payments obtained through DCMWC or the Division of Coal Mine Workers' Compensation are considered tax-free benefits or income.
The Bottom Line
While certain types of income are usually considered exempt from taxation and IRS collection, there may be exceptions, and particular criteria may apply. Before deciding whether income is subjected to taxation or not, it's recommended to consult a tax professional or visit the IRS website for up-to-date information.
