State payments to foster parents for the care of children who are formally placed with them are generally tax-free income. In some cases, one particular type of payment may be tax-free, while another, very similar, results in a tax bill. Here are three cases where you need to be very careful. Also, keep in mind that in some cases, your personal circumstances, such as the amount of money you earn, can impact seemingly tax-free situations. There is no federal estate tax, so anything your great-uncle left behind shouldn`t raise immediate tax issues. However, if he left you an asset that generates income, such as a dividend-paying stock, you may have to pay taxes on the money the inheritance earns. (See which states have inheritance taxes.) » MORE: Check your tax liability with our free tax calculator Here are the most common sources of tax-free income: So if you`re getting money that you think is tax-free, check it out. IRS Publication 525 provides details on taxable and non-taxable income. A tax professional can help, and a good tax software will also guide you through all the variables. What does the IRS tax? Just about everything.
Here`s a quick guide to the difference between taxable and non-taxable income, as well as a list of types of tax-free income. If your business helps you cover the cost of adopting a child, it`s usually not taxable income. For fiscal year 2020, the employer`s tax-free adoption assistance was $14,300 per child. In 2021, it`s $14,440. The amount you can exclude depends on your adjusted gross income as modified. Here are 14 examples of tax-free income that Uncle Sam`s tax collector can`t do. Social Security is usually tax-free if it`s your only source of income. However, if you have other income – for example, part-time employment, a taxable annuity or capital gains – you may have to pay federal tax at your normal income tax rate up to 85% of your federal government pension benefits. The proceeds from home sales are tax-free for many as long as the profit is at or below a certain threshold: $250,000 for a single seller and $500,000 for a married couple filing a joint return. But if you commit real estate murder, the IRS will levy taxes on the amount you pocket above those thresholds. The interest you earn on government and municipal bonds is generally not taxable.
Even better, if you buy municipal bonds issued by the state where you live, the interest is generally not taxable at the state level either. (Learn how to start buying bonds.) You have upgraded the air conditioning in your home and received a rebate from your electricity supplier as a reward for your energy-saving efforts. This financial thanks, whether in the form of a direct or indirect subsidy for the purchase or installation of an energy-saving measure at home, is generally tax-free income. Some legal regulations are not taxable, but others are. To determine whether you owe the U.S. Treasury part of your court order, think about what the settlement replaces and why it was granted. Proceeds of emotional distress or mental anguish, such as a result of physical injury or illness, are usually exempt from tax. However, punitive damages awarded by the court are taxable, even if the punitive damages were related to a settlement for bodily injury or illness. That`s a lot of territory that includes not only earned income such as salaries, but also unearned income from investments. If you work cashless, the value of the items you receive in exchange is also taxable. The same goes for game jackpots and prize winnings. If you are an officer who served in a combat zone or was hospitalized due to your service, the amount you can exclude is limited to: Tax-free monthly scholarship to offset internet and mobile phone costs.
Reporting to: Senior Grants Manager. Travel costs: Up to 15%. Officers can exclude all military salaries for each month in a combat zone. >>MORE: Learn How Capital Gains Tax Works for Home Sales When you make a permanent civilian position (PCS) change with the government, the Internal Revenue Service (IRS) takes into account the majority of yours. If a lender has cancelled debts that you owe, you may be able to exclude them from your gross income if the debt was cancelled in bankruptcy, was cancelled if you are bankrupt, was an eligible farm debt, was related to an eligible real estate transaction, was intended for a gift, or was intended for your home. There are exceptions and details to understand, so be sure to read IRS Publication 525. The Tax Reduction and Employment Act 2017 makes certain refunds/payments taxable. DFAS Customer Service Centers respond to customer inquiries and requests. Kay Bell is a former writer for NerdWallet. Read more Do capital gains apply to money from garage sales? The answer depends on a number of factors.