Exemptions from tax, also known as non-taxable income, refer to the income that is not subject to income tax. This income may be exempt from tax for a variety of reasons, such as being below a certain threshold or being earned through certain sources. In this article, we will delve deeper into the concept of non-taxable income and the types of income that are exempt from tax.
What is Non-Taxable Income?
Non-taxable income is income that is not subject to income tax. This income is excluded from a taxpayer’s taxable income, which means that it is not counted when calculating their tax liability. This income can come from a variety of sources, such as gifts, inheritances, and certain types of insurance payments.
Types of Non-Taxable Income
There are many types of non-taxable income, some of which include:
1. Gifts and Inheritances: Gifts and inheritances are generally not considered taxable income for the recipient. However, there are certain exceptions to this rule, such as when the gift or inheritance is from a foreign individual or entity.
2. Life Insurance Benefits: The death benefit paid out from a life insurance policy is generally not considered taxable income, regardless of the amount.
3. Disability Insurance Payments: Disability insurance payments are generally not considered taxable income if the premiums were paid with after-tax dollars.
4. Veterans’ Benefits: Veterans’ benefits, including disability compensation and pension payments, are generally not considered taxable income.
5. Workers’ Compensation: Workers’ compensation payments are generally not considered taxable income.
6. Municipal Bond Interest: Interest earned on municipal bonds is generally not considered taxable income at the federal level. However, it may be subject to state and local taxes.
7. Roth IRA Distributions: Distributions from a Roth IRA are generally not considered taxable income if certain conditions are met, such as the account being open for at least five years and the individual being over age 59 ½.
In conclusion, non-taxable income refers to income that is not subject to income tax. There are many types of non-taxable income, including gifts, inheritances, life insurance benefits, disability insurance payments, veterans’ benefits, workers’ compensation, municipal bond interest, and Roth IRA distributions. It is important to understand the types of income that are exempt from tax to ensure that you are accurately reporting your taxable income and avoiding any potential penalties or legal issues.