Sources of income that are not reported on a federal or state tax return

Please write a column on sources of income that are not reported and taxed on a tax return.

— P.E., ADHOC

A "kinder and gentler" IRS has been present in our lives as a result of free RIDES that are part of the Internal Revenue Code. Namely: Rebates, Interest on municipal bonds, Damages, Education Saving Bonds and Stock dividends.

REBATES are treated by the Code as part of the "bargaining process" between customers and businesses. The "poster child" on rebates is Menards, which provides rebates on almost every transaction. These rebates are used by Menard's customers to offset the purchase price on future transactions. Other entities involved in the sale of furniture, vehicles and/or providing services offer cash rebates to folks buying their goods or using their services. In these instances, the cash rebate received by an individual is not reported on his/her income tax return.

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INTEREST on municipal bonds is also given the "Mulligan" treatment by the taxing authorities. Thus, interest paid on debt instruments issued by a state, city or local government is reported but not taxed … that's the GOOD NEWS. The "downside" of this special treatment is that the municipal bond interest rate is usually lower than the going market rate.

DAMAGES (other than punitive) tied to a personal injury or an incident that destroys or drops the value of property such as a vehicle, real estate or other personal assets of the taxpayer are not taxed. The payment represents an attempt to (1) recognize the physical and/or emotional impact of an accident/traumatic event on an individual and/or (2) replace or restore property involved in the incident. To repeat, punitive damages are reported and taxed.

EDUCATION SAVINGS BONDS (a.k.a., qualified Series EE savings bonds) generate interest which is not reported as it builds over time and at bond redemption. A key provision: the interest must be used to pay tuition and fees at a "post-secondary educational institution." This exclusion is phased out for high-income taxpayers.

STOCK DIVIDENDS received in the form of additional shares of the company declaring and providing the securities are not reported. Note: this applies to situations where the individual receives more stock and not in cases where a cash dividend is paid by the company.

There are other cases where something of value (e.g., cash, property) is received but no income is taxed. Gifts, Social Security benefits (can be excluded based on falling below specific income limits) and certain de minimis benefits such as meals or other "perks" tied to one's employment are included in this category.

Ken & Klee's Tax Notebook

Turbo Tax, one of the most popular income tax software products, is in trouble with the Federal Trade Commission for engaging in "deceptive advertising, when it ran ads for 'free' tax products and services for which many consumers were ineligible." Intuit, the parent company of Turbo Tax, is prohibited from "advertising or marketing that any good or service is free for all consumers or it discloses clearly and conspicuously and in close proximity to the 'free’ claim the percentage of taxpayers or consumers that qualify for the ‘free’ product or service. Alternatively, if the good or service is not free for a majority of consumers; it must disclose that a majority of consumers do not qualify."

Tax Talk is an outreach service of the Notre Dame-Saint Mary’s College Vivian Harrington Gray Tax Assistance Program (TAP).

Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact Rick at rklee@nd.edu.

Ken Milani, a professor of accountancy at Notre Dame, co-founded the TAP and served as its faculty coordinator for 39 years. Contact Ken at milani.1@nd.edu.

E-mail questions to either.

This article originally appeared on South Bend Tribune: Tax Talk: Sources of income not reported on a tax return