Seven Types of Tax-Free Income
By Greenstein Rogoff Olsen & Co.
It’s a well known fact that Uncle Sam reserves a portion of your paycheck every pay period. However, there is good news! Listed below are seven types of your income that are generally excluded from U.S. federal income taxation:
1. Gift receipts
Although the gift bearer may have to pay gift tax, you don’t owe the federal government a dime. All cash and cash equivalent gifts you receive are income tax-free.
2. Making Work Pay credit
For tax years 2009 thru 2010, the Making Work Pay Credit was a refundable tax-free credit at $400 for working individuals and $800 for married taxpayers.
In 2011, the Making Work Pay credit was replaced by reducing a part of your social security taxes. Benefits such as these you receive are free from income taxation.
3. U.S. federal tax refunds
All federal income tax refunds are non-taxable, whereas state income tax refunds might be taxable.
4. Roth IRA withdrawals
A Roth IRA is simple. You pay the tax now so that when you make a qualifying distribution later you don’t pay federal income tax.
This is in contrast to a traditional IRA. With a traditional IRA, your contributions are put into the account tax-free. However, when you make a distribution later the entire amount becomes taxable.
5. Life insurance proceeds
The proceeds collected by a surviving beneficiary from a life Insurance policy are not subject to income tax. Nevertheless, the proceeds may be subject to the federal estate tax (death tax).
6. Child support
Whether court ordered child support is paid or received, there is no federal income tax repercussion. This is very different from alimony, which does have federal income tax consequences.
7. Return of capital
Interest, dividends or growth earned on your principle investment are taxable. However, the simple return of your principle contribution is tax-free.