In the first of our two-part series we discussed the various types of taxable income. To take the conversation further, we will explore some of the most common nontaxable income types. It is important to remember that all income is taxable, unless the law categorically specifies it as an exception. Let’s take a look at what income types qualify for exemption.
Nontaxable Income Types
S Corporation Income
An S Corporation is a closely held entity that is exempt from income tax deductions. The income or losses that S Corporations get are passed on to the shareholders, who in turn report the same. Although the income is taxed at the shareholder level, S corporations must file returns on the Form 1120S to declare the corporation’s results for the particular tax year.
There are several types of gifts that are nontaxable. If taxes are applicable, the donors are responsible for paying them, not by the receivers. Under special arrangements, recipients may agree to pay the tax. Some of non-taxable gifts are:
- Gifts that do not exceed the annual exclusion limit for a particular calendar year.
- Gifts to a spouse
- Gifts to any political party
- Tuition or medical expenses you carry for somebody
It is worth mentioning here that annual exclusion applies to gifts to each individual recipient. For example, if you give a monetary gift to each of your children worth a specific amount on or after January 1, the annual exclusion is applicable to each gift. The annual exclusion for 2014-2016 is $14,000.
The IRS states that the health care benefits that the employer provides to their employees is not a part of the employee’s income, and therefore, it is not taxable. The coverage can either be in the form of a health insurance that the employer provides through a third party or a part of health reimbursement arrangements. In addition to employer-provided long-term insurance, the deposits made into the health savings account are also nontaxable.
The life insurance proceeds that a beneficiary receives upon the death of an insured person is usually not taxable. If the insurer however, redeems the policy for cash the amount that exceeds the cost of the policy is subject to tax.
Last Few Words
Tax related matters are often complicated, and therefore, it is advisable to seek the help of a professional if you are unsure about the taxability of any of your incomes. A tax professional will not only help you save money by filing your taxes correctly, but also save you from any penalties you may have to face in case of an incorrect or negligent tax filing. Should you wish to learn more or have any questions please feel free to contact us for a no-obligation consultation.