List of Federal Exempt Income

List of Federal Exempt Income

Under the Internal Revenue Code or 26 US Code all types of income are taxable unless they are specifically excluded by law. So , whenever you receives any money or benefit in any form -cash,property or services chances are that federal tax law will cover such receipts .But good news is that there are a number of exceptions in the taxation laws that tax exempts income . This post list all those income

1. Disability Insurance Payments

Usually, disability benefits are taxable if they come from a policy with premiums that were paid by your employer. However, there are many other categories of disability benefits that are nontaxable.

  1. If you purchase a private disability insurance plan on your own or supplemental disability insurance through employer with after-tax dollars, any benefits you receive from that plan are not taxable.
  2. If you got any injury during working period or have any work related injury , you may receive some kind of monetary disability benefit also known as workers’ compensation . That sum is not taxable under 26 US Code.
  3. Similarly , any compensation for in following situation is tax exempt
    • physical injury or physical sickness, or
    • for the permanent loss of a part of your body or
    • function of your body,or
    • permanent disfigurement
  4. Disability benefits from a public welfare fund are not taxable.
  5. If you receive any disability benefits under a no-fault car insurance policy as a result of injuries , such compensation from insurance company is not taxable .

What is after tax dollar ?If you earn the money, pay income tax on it, and then deposit it into some type of account, or buy an investment with it, you have used after-tax dollars

What is No-fault insurance ? means that your own automobile insurer will pay some or all of your medical bills and lost earnings if you get into a car accident, regardless of who was at fault for the crash

2.Health Insurance by Employers

  1. The premium paid for your health insurance by your employer to a third party or coverage and reimbursements for medical care provided through a health reimbursement arrangement (HRA).
  2. Apart from that , the employer and employee contributions to a health savings account are also not taxable.
  3. Employer-provided long-term care insurance is not taxable
  4. The Archer MSA contributions (a type of medical savings account) are also not taxable.

3. Receipt of Gift of any amount

The gifts are non taxable in hand of recipients. However , gifts from employers are taxable as it is considered fringe benefits if value is in excess of $ 25, not gifts. Please note that the taxation is on gift giver i.e donor .

4. Life Insurance Payouts to Beneficiaries

Life insurance payouts to beneficiaries are generally tax exempt unless it falls under some exceptions like interest you receive is taxable. See IRS help Topic 403 for more information

Another exception is that if the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. Please refer  Publication 525, Taxable and Nontaxable Income.

5.Death Benefits to Public Safety Officer & others

  • When a public safety officer is killed in the line of duty , any payment to them by the employer is tax free. Please note that the public safety officers include chaplains, ambulance crew, police officers, rescue workers and firefighters.
  • Death payments received because of military action or a terrorist attack are nontaxable.
  • If an astronaut dies in the line of duty, any payment to them are not subject to tax

6. Capital Gains on Sale of Principal Residence

Individuals and married couples can claim tax exemption or exclusion of capital gains on sale of their house upto $250,000 or $500,000 respectively of capital gains from the sale of their principal home provided they fulfill the conditions set for capital gains exemption .

7. Benefits of Inheritance

The estate of an individuals are exempt from paying estate tax upto $11.2 million, whereas estate of couples get tax exemption upto $22.4 million.

8. Municipal Bond Interest

Generally , interest in municipal bonds are tax free irrespective of the fact whether you invest in individual municipal bonds or purchase them through a municipal bond fund.