Remember Stacy Knutson? She was the waitress I posted about earlier today who was given $12,000 in a take out box by a customer. The story generated an interesting comment (thanks travisborton) about treasure trove, income and the IRS.
Of course, that got me thinking: what else could you put in your pocket and not be taxed on?
Taxable income is defined at 26 USC §63 as gross income less deductions. Gross income is defined at 26 USC §61 as well, nearly everything. The statute even starts out by saying: “gross income means all income from whatever source derived…”
With that, it’s generally easiest to go with the idea that our system includes nearly everything unless it’s specifically excluded. Simple, right? Well, not particularly great for taxpayers but simple.
So what gets excluded? There are actually quite a number of instances when you can make a deposit or go straight to the store to buy those Jimmy Choos without being taxed on money or benefits that comes your way. Here are 33 of the most common and interesting benefits and sources of money that aren’t taxable for federal income tax purposes:
- Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income.
- Child support payments. Alimony is tax deductible to the payor and taxable to the recipient. But child support is completely tax neutral: no deduction to the payor and not taxable to the recipient.
- Employee achievement award. If you receive tangible personal property – generally, a thing you can touch like cufflinks or the dreaded grandfather clock – as an award for length of service or safety achievement, you generally can exclude its value from your income. However, the amount you can exclude is limited to your employer’s cost and cannot be more than $1,600 for the whole year. Your employer must make the award as part of (and I’m not making this up) ameaningful presentation so that it doesn’t just look like disguised pay. And yes, it has to be tangible personal property to be excluded since cash, a gift certificate, or an equivalent item are taxable, even if given for the same reason as you received a lovely painted ceramic dog.
- Deferred compensation and retirement plans. This is kind of a trick on my part since these plans aren’t so much exempt as they are deferred. Your employer will report to you the total amount of deferrals for the year under a deferred compensation plan; that amount is generally not included in your income until you make a withdrawal.
- Sick pay benefits from certain insurance policies. If you are sick or injured and you receive compensation from your employer, that’s taxable, as are funds from a welfare fund; a state sickness or disability fund; an association of employers or employees; and an insurance company, if your employer paid for the plan. However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable.
- Health savings accounts (HSA). If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA; those contributions made by your employer are not included in your income. Additionally, when you take the money out to pay qualified medical expenses, it’s not included in your income.
- Gym benefits. If your employer provides you with free or low-cost use of an employer-operated gym or other athletic club on work premises, the value is not included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children. But if your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation.
- De Minimis (Minimal) benefits. De Minimis is Latin for “you’re not getting a real perk.” I kid. It’s really Latin for “of minimum importance” or “trifling” which, quite frankly, sounds worse. But if your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income.
- Employee gifts at the holidays. I know you really want the cash, but your employer is doing you a favor at the holidays when they give you you a turkey or ham (in our office, it tends to be cheese and beer). Those items don’t count as income to you. But if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, it’s no longer considered a gift even if it comes in a big fat Santa card: it’s compensation.
- Employee discounts. If your employer sells you property or services at a discount, you generally don’t have to include the amount of the discount from your income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work and not for real property or property commonly held for investment (such as stocks or bonds). As a former employee of the Gap, I happen to appreciate this exception.
- Life insurance proceeds. In most instances, life insurance proceeds are not taxable to you.
- Meals on work premises. You don’t have to include, as compensation, the cost of meals served on your employer’s premises so long as they’re furnished for the convenience of your employer.
- Lodging on work premises. You also don’t have to include, as compensation, the cost of lodging on your employer’s premises so long as it is furnished for the convenience of your employer, and is a condition of your employment.
- Moving expense reimbursements. In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the reimbursement is not included in your income.
- Transit passes or free parking. If your employer provides you with a qualified transportation fringe benefit, such as a transit pass, qualified parking or a qualified bicycle commuting reimbursement, it can be excluded from your income, up to certain limits (generally around $230).
- Employer-provided vehicles. If your employer provides a car to you for business use, your personal use of the car is usually a taxable non-cash fringe benefit.
- Veterans’ benefits. Veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA) are exempt from tax.
- Peace Corps. Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are exempt from tax. This is a very specific exemption: allowances for living expenses for other pursuits – even charitable ones – may be includable as income.
- Workers’ Compensation. Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.
- Black lung benefit payments. These payments are just like workers’ compensation and are not taxable in most cases.
- Compensatory damages. Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments are not taxable.
- Some canceled debts. Most canceled debt is actually taxable. However, you would not include in income a canceled debt if the debt is canceled in a bankruptcy case under Title 11 of the U.S. Code or to the extent that you are insolvent (as defined by the IRS).
- Welfare and other public assistance benefits. Do not include in your income governmental benefit payments from a public welfare fund based upon need.
- Disaster relief payments. You can exclude from income any amount you receive that is a qualified disaster relief payment.
- Home Affordable Modification Program (HAMP). If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable.
- Medicare. Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of the individuals for whom they are paid. This includes Part A and Part B.
- Campaign contributions. These contributions are not income to a candidate unless they are made available for his or her personal use (remember the whole Palin wardrobe scandal?). To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns.
- Cash rebates. A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate (if applicable).
- Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.
- Historic preservation grants. Do not include in your income any payment you receive under the National Historic Preservation Act to preserve a historically significant property.
- Interest on qualified savings bonds. You may be able to exclude from income the interest from qualified U.S. savings bonds (series EE issued after 1989 or series I) you redeem if you pay qualified higher educational expenses in the same year. The bond must have been issued to you when you were 24 years of age or older.
- Interest on state and local government obligations. Interest on state and local obligations (generally, bonds) is usually exempt from federal tax.
- Scholarships and fellowships. A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship used to pay tuition and fees to enroll at or attend an educational institution, or fees, books, supplies, and equipment required for courses at the educational institution. Amounts used for room and board do not qualify for the exclusion.
So, whew. Even though it feels like everything is taxable, it’s really not. You get a break here and there. Believe it or not, this list is only a short list of income and benefits that aren’t taxable for federal purposes… there are more, depending on your facts and circumstances. And, since it’s the Tax Code, there are also all kinds of exemptions and caveats, so check with your tax professional if something doesn’t make sense to you.
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