As you are probably painfully aware, the vast majority of your income is taxable. Whether you earn it through a salary, hourly wages, tips, commissions, rent from property that you lease or via interest and dividends on your investments, Uncle Sam is going to demand his share of the take.
Think you can sidestep income taxes by bartering? Think again. Even barter income is taxable. Let’s say you exchange your hair-cutting services for lawn-cutting services. Seems like a fair trade, right? According to the IRS, you must pay tax on the fair market value of the mowing services you receive.
What if you decide to do something really unsavory and embezzle funds from your boss or your book club? Believe it or not, that income is also taxable. In fact, the IRS specifically spells out that kickbacks and embezzlement proceeds are subject to income tax.
Is there any way an income-earning taxpayer can catch a break? As a matter of fact, quite a few kinds of income are deemed tax-free. Here are 17 types of income the IRS can’t touch:
1. Veterans' Benefits
Benefits paid to veterans and their families are nontaxable. They include:
- Education, training and subsistence allowances
- Disability compensation and pension payments for disabilities
- Grants for homes designed for wheelchair living
- Grants for motor vehicles for veterans who lose their sight or use of their limbs
- Insurance proceeds and dividends paid either to veterans or to their beneficiaries
- Interest on insurance dividends left on deposit with the Veterans Administration
- Benefits under a dependent-care assistance program
- The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001
- Payments made under the compensated work therapy program
- Any bonus payment by a state or political subdivision because of service in a combat zone
2. Child Support Payments
Any money you receive for child support is not taxable.
3. Welfare Benefits
Welfare payments are not taxed by the IRS.
4. Workers' Compensation
If you receive workers’ compensation for an employment-related illness or injury, this income is exempt from taxes provided that payments are made under a workers’ compensation act.
5. Foster Care Payments
If you are a foster parent receiving foster payments from a child placement agency or the state or local government, this income is not taxable.
6. Casualty Insurance
Casualty insurance payments you receive are tax-free unless the payments exceed your loss.
7. Payments from a State Crime Victims' Fund
If you receive payments from a state fund for the victims of crime, this is also nontaxable income.
If you receive an inheritance from a deceased friend, relative, or even an acquaintance, you do not have to pay federal taxes on it. That’s because the estate of the deceased pays all the taxes, if any are due, before you receive the inheritance. Some states do impose state taxes on inheritances, so check.
9. Disaster Relief Grants
Under the Disaster Relief and Emergency Assistance Act, if you receive post-disaster relief grant payments and use the income to meet your necessary expenses or needs for medical, dental, housing, personal property, transportation or funeral expenses, this income is exempt from taxes.
10. Black Lung Disease Benefits
Any federal black lung benefit payments you receive through the Division of Coal Mine Workers’ Compensation (DCMWC) is considered nontaxable income.
11. Supplemental Security Income
This U.S. government program provides monthly benefits to low-income people who are either 65 or older, blind or disabled. The Social Security Administration administers the Supplemental Security Income (SSI) program, but the monies for it come from U.S. Treasury general funds, not the Social Security trust fund. SSI payments are not taxable.
12. Interest on Municipal Bonds
Interest on bonds issued by states, cities, counties and other government entities to finance their operations are generally exempt from federal income tax. They may also be exempt from state and local taxes, depending on whether you reside where the bond was issued.
13. Compensatory Damages Awarded for Physical Injury or Sickness
Damages awarded for physical injury, physical illness, or emotional distress due to a physical injury or sickness are typically exempt from taxes.
14. Gambling Income (Sometimes)
Gambling income is nontaxable only if your losses exceed your winnings for the tax year. If, on the other hand, your gambling income exceeds your losses, that income is taxable. You need to report, separately on your tax forms, winnings as income and can deduct losses up to the amount of your winnings if you itemize your deductions.
If you receive a monetary gift from a relative or friend, you do not owe taxes on that income. If the gift is more than $15,000, the giver may owe gift tax, but you do not.
16. Combat Pay
The income you receive while stationed in a combat zone is usually not taxable.
17. Vacation Rental Income (Limited)
If you rent your personal home for less than 15 days during the tax year, then this income doesn't need to be reported.
The Bottom Line
While it often seems as if the IRS manages to take a bite out of every type of income you could possibly earn, there are quite a few exceptions to that rule. Before you assume any income is taxable or nontaxable, double check with a tax professional or visit the IRS website.