7 Sources of tax-free income!
As a general rule, all income you receive in the form of money, property, or services is taxable and must be reported on your income tax return - unless specifically excluded by US tax laws. Even though it feels like everything is taxable(!), below are 7 sources of income you can put in your pocket tax-free!
1. Real estate income
Sale of your main residence : If you sell your home for a profit, you may be able to exclude up to $250,000 (single) / $500,000 (married filing jointly) of the gain - if you meet certain timing and ownership requirements (Home sale exclusion).
To read more on other ways to sell real estate tax free: https://www.kbfinancials.biz/3-ways-to-sell-real-estate-tax-free-.html
Rental Income: rental income you collect for a rental period shorter than 14 days in the year is exempt from taxation.
To know more about other real estate tax benefits: https://www.kbfinancials.biz/real-estate---immobilier.html
2. Retirement income
Social Security: if social security is your only source of income once you retire, it is not taxable.
To know more about retiring in the US: https://www.kbfinancials.biz/prendre-sa-retraite-aux-etats-unis.html
Roth IRA: distributions from your Roth IRA retirement accounts once you reach 59½ year old, or you suffer from disability or you purchase your new home, are tax free. To qualify you must have held the Roth IRA account for 5 years minimum
3. Health
HSA account: distributions from Health Savings Account (HSA) are tax free if they are used to pay for medical costs.
To know more about other Health tax deductions: https://www.kbfinancials.biz/tax-benefits-for-your-medical-expenses.html
4. Education
Coverdell / ESA: distributions from Education Savings Account (ESA) are tax free if they are used to pay for tuition and books.
Scholarships: moneys received as part of a scholarship are tax free if you are a degree candidate at an eligible educational institution and you use the funds to pay for tuition.
5. Investment income
Stock & dividends: the first $40K (single) / $80K (married filing jointly) of the capital gain / dividends on shares /stock are tax free if you hold them as investment for one year or more (long term capital gain rates).
To read more on capital gain tax : https://www.kbfinancials.biz/l-imp-t-sur-les-plus-values--capital-gain-tax--.html
Municipal bond : interest income on bonds used to finance government operations issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions such as port authorities, toll road commissions, utility services authorities, community redevelopment agencies, or qualified volunteer fire departments is tax free.
6. Gift & Inheritance
Gifts: assets or cash gifts received from friends or family are not subject to income tax. However, they may subject to gift tax reporting.
To read more on international gifts: https://www.kbfinancials.biz/la-donation-internationale.html
Inheritance: an inheritance received when someone passes is tax-free if it’s under $11.7 million (Federal estate exemption).
To read more on estate tax: https://www.kbfinancials.biz/pr-parez-votre-succession-internationale-en-2--tapes.html
7. Damages & support
Child support: payments you receive as child support as part of a divorce decree as not taxable.
Physical injuries: amounts you receive as compensation for physical injury or sickness – including awards received for loss of wages or earnings, loss of earning capacity, and for impairment, medical bills, etc. are not taxable.
Workers compensation: amounts you receive as compensation for workplace injuries are not taxable.
As always in tax law, there are exception to the above rules, so make sure you contact your tax professional Karine Bauer, EA for answers specific to your tax situation. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional. Karine Bauer, EA is an IRS Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. Karine is also a Quickbooks Pro-Advisor and a member of the Association of Chartered and Certified Accountants (ACCA). She is an experienced tax professional with more than 20 years of international experience.
Bear in mind the date of this article as tax laws evolve over time.
Updated on : August 3rd, 2022