What Types of Income Aren’t Taxable?

Young happy mother going through home finances and communicating with her baby son.
Drazen Zigic / Getty Images/iStockphoto

Two things in life are certain: death and taxes. Both are grim, but there’s some good news about the latter. No matter what line of work you happen to find yourself doing these days, you know that the government has to take a bite out of your paycheck on a state and federal level. However, what’s less commonly known is that there are seven bonafide types of income that are non-taxable. You don’t need to be a CPA to keep these earnings tax free. Here’s a handy-dandy review of all the non-taxable incomes you might qualify for.

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1. ‘Tis Better To Give Than Receive

Did you know that most gifts, bequests and inheritances can go right into your banking account, and you don’t have to worry about the tax collector coming by to ask for a piece of the pie? Now that’s a present to keep in mind. But it can’t be that easy, right? You might be asking yourself if you aren’t paying the taxes on a gift, then who is. According to the Internal Revenue Service (yep, the IRS themselves), the answer is that “the donor is generally responsible for paying the gift tax. Under special arrangements the done may agree to pay the tax instead.” Thanks for the gift that keeps giving, Uncle Sam.

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2. Sweet Child of Thine

Being a parent is tough these days and sometimes it can put a strain on a partnership. When divorce or separation happens and there are kids involved, most likely one of the parents will be contributing to child support payments. If you are the parent receiving those funds, breathe easy because they are non-taxable. Child support falls under the category of a “tax-neutral” event. The Market Realist breaks down that “Since the parent paying child support is theoretically paying funds to cover basic living expenses for their child, child support isn’t a tax-deductible expense.” This is one less thing to have to worry about as a parent who receives monetary support while raising children.

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3. Cash Rebates Are King

We all love cash, but how many of us are taking real advantage of cash rebates that are given out to customers from manufacturers or dealerships? “A rebate is not subject to tax; it is considered a reduction of the item’s price and works in the same way as a direct discount,” explains DoNotPay.com. But keep an eye on the fine print, since rebates can sometimes come with other strings attached, and you’ll want to know what you are signing up for before you spend the money.

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4. To Your Health!

Here’s just what the doctor ordered: most-emphasis on most-health benefits are not able to be taxed. This is because the Affordable Care Act does not classify health insurance as income which is subject to a tax. This even includes employer provided benefits. However, keep in mind that depending on what your health insurance policy is, many of the benefits covered are taxable. Check with your insurance company about how this might affect you when it comes time to file your taxes so your heart doesn’t skip a beat or two.

5. Alimony vs. Alimony

The definition of “alimony” from the IRS is: “Amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony or separate maintenance payments for federal tax purposes.” The tax laws have changed a lot and depending on when a divorce occurred, it could determine who pays whom and how much. Any separation or divorce finalized on or before December 31, 2018, means that the person who receives the alimony money would pay federal income tax. However, since Jan. 1, 2019, those taxes are now owed by the party in the separation or divorce who is making the alimony payments.

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6. Well, Fair on Welfare

Welfare or federal financial assistance are programs that help millions of Americans receive benefits every year, including Social Security, Aid to Families with Dependent Children (AFDC), food stamps and other social welfare programs. If you are receiving these or other benefits, the government does not wish to put any more financial burden on you, so they are typically not taxed. Ask a certified accountant if you should include welfare payments when you file your taxes in case you should be subject to an audit down the road.

7. FYI on QAEs

Qualified Adoption Expenses, commonly referred to as QAEs in the tax world, are “the necessary costs paid to adopt a child younger than 18 years of age or any disabled person who requires care” as described by Investopedia. The IRS classifies expenses such as fees related to the adoption, attorney costs, court fees, travel, and several others as QAE, so long that they are “reasonable” and “necessary.” Use the money you save to treat your adopted family to a lifetime of love and care.

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