Benjamin Franklin famously penned that “in this world nothing can be said to be certain, except death and taxes.” This tongue-in-cheek idiom has become a popular lament that seems to resurface each tax season. Small business owners, especially, are affected by its implications. While you cannot legally “get out of” paying taxes, there are certain types of income that are non-taxable. By using this complete guide to non-taxable money, you can legally reduce your tax liability and ensure that you are not overreporting your income.
What Money is Taxable?
In order to make sure that you are legally reporting your income, it’s important to establish a baseline of what revenue is taxable. According to The Hartford Small Biz Ahead, the following sources of income are always taxable:
• Employee compensation (wages paid to you by your employer)
• Business income. To determine your business income, subtract your deductible business expenses from your overall revenue. If you are self-employed, make sure you have all the information on how to limit your tax liability by reading our article on how to lower your self-employment taxes.
• Rental income on any properties you own (although up to 20% of qualified business income for real estate holdings may be deducted thanks to a new safe harbor rule for real estate.)
• Royalty income from copyrights or patents
• Investment income other than the types listed in the non-taxable investment section below
• Retirement income including distributions from your 401(k), 403(b), pension, or IRA. Some Social Security benefits may also be taxable depending on your income bracket.
However, some money is non-taxable. The following income is not taxed:
• Alimony payments
• Welfare benefits
• Child support payments
• Tax-exempt interest (such as interest made from municipal bonds. This interest can be reported on your 1099-INT and will not be taxed.)
• Inheritance (other than money made from the sale of an inherited property, which may be taxable)
• Settlements won for injury or sickness
• Cash rebates for products you have purchased
• Life insurance proceeds
• Scholarships for tuition and school supplies. However, scholarships that cover room and board are considered taxable.
• Most healthcare benefits
• Reimbursements for qualified adoption expenses
• De minimus fringe benefits
There are also investments that are considered non-taxable, including:
• Municipal bonds
• 529 Plans
• 401(k) retirement plans
• Roth IRA
• Gifting Stock
Knowing what money is and is not taxable helps you to make sure that you are paying the appropriate amount of tax and are not under or over-reporting your income. While paying taxes isn’t necessarily pleasant, being cognizant of the non-taxable sources of income that you receive can help you plan to minimize your tax liability and avoid paying more than your fair share.