7 things you don't have to pay taxes on
Uncle Sam may act like the greediest relative ever, but he won't take every dollar that comes your way. It only seems like it.
So if you're starting your taxes soon or are in the midst of it and feeling full of despair, take a little heart. Here are some items you don't have to pay taxes on.
1. Profits on your house.
Did you sell a home in the last year? You may be in luck, says Pam Blair, owner of San Mateo, California-based Compass Financial Management, which specializes in tax services.
"One of the few things in the tax code that provides us with tax-free income is your personal residence," Blair says. "As long as you've lived in your personal residence for two out of five years before selling your residence, you can exclude up to $250,000 in gain from taxation – $500,000 for most married couples. It's one of the last remaining sources of tax-free income."
But again, this is your primary residence, not a rental property, and there may be some restrictions if you were, say, running a business out of the home, Blair says. If you think you fall into a gray area, you'll want to consult a tax professional.
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2. Money received from selling personal assets.
In other words, everything in the house that you've sold. But there are some important exceptions, says Daniel Henn, a certified public accountant in Rockledge, Florida. For starters, you can keep the money from your car, your computer, your furniture – provided you sold it for less than the original purchase price, Henn says.
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"Generally, that wouldn't apply to jewelry, real estate or collectibles," Henn says, since that's assuming those items increased in value, he adds.
3. Employee benefits and other fringe benefits.
Maybe your boss has occasionally given you a gift, and you've thought, "You know, I wish she had just given me money instead." Well, that would be nice, but you'd also pay taxes on it. The gift may actually be the nicer gesture.
"There are a number of employee-benefit programs that you can receive from work without having to pay taxes," says Benjamin Grosz, a tax attorney at Ivins, Phillips & Barker in the District of Columbia.
As for what you can be given by your company tax-free, as long as your employer follows various rules, "which can get complicated," Grosz cites a slew of examples: insurance coverage, transit subsidies, educational assistance, moving expenses, free use of the company gym, subsidized meals at the company cafeteria, personal use of a company-provided cellphone, tickets to a sporting event or show and holiday nonmonetary gifts, like a Christmas ham.
So if your boss has given you a mix of those perks, especially the expensive stuff like transit subsidies and free use of the gym, you may want to give him or her a hug. Well, in this day and age of mixed signals, maybe just a friendly fist bump.
4. Child support.
That's right. It isn't taxable. "As long as it is not classified in any way as alimony," Hann stresses.
Because, yes, if you receive alimony, that is taxable.
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5. A medical settlement or workers comp.
Good news here, mostly. "This income is nontaxable, unless it includes interest, income for punitive damages or lost wages," says Crystal Stranger, a tax accountant based in Los Angeles who runs 1stTax.com, an online tax preparation service.
She adds: "Generally, a good lawyer will structure the settlement to be primarily for future medical expenses and related emotional distress, which are nontaxable forms of payment."
Gifts. Did a relative give you money? You don't need to consider it income, says Kevin Smith, an executive vice president and financial advisor with Janney Montgomery Scott, a wealth management and investment banking firm in York, Pennsylvania.
"In rare instances in which the gift is sizable and subject to gift tax, the donor, not the recipient, is responsible for any gift taxes due," Smith adds.
6. Life insurance payouts.
Did you lose a spouse or a parent who looked out for you by getting life insurance? You won't have that added insult to injury by having the IRS take a chunk of that money, Smith says.
But sure, there's always that rare caveat. Life insurance, when you get the money all at once, isn't taxable.
"Should the insurance beneficiary elect to receive an insurance payout over a period of months or years, however, each payment is considered part interest and part return of principal," Smith says. "In this instance, only the amount considered interest would be taxable, whereas the amount considered to be a return of principal would be income tax-free."
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7. Frequent flier miles.
This is a great example of something that can be worth thousands of dollars, but you don't have to pay tax on it, says Robin Solomon, a tax and benefits attorney with Ivins, Phillips & Barker in the District of Columbia.
"If the miles are awarded by the airline or in connection with credit card use, they are considered nontaxable rebates. The same rule applies to loyalty programs sponsored by hotels and rental cars," she says.
There are some exceptions, Solomon adds. "One catch is that you can't exchange the miles or points for cash," she says. "Cash is always taxable."
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