One of the shortest sections of the federal Tax Code is Section 61. It defines gross income as “all income from whatever source derived.” But don’t take this literally. There are many kinds of income that are not taxable. Types of income that you don’t pay federal income tax on:
Gain on the sale of your home
If you sale a house that was your primary residence for at least 2 of the previous 5 years you can exempt up to $250,000 from tax ($500,000 if married filing jointly). If you don’t mind moving every few years this strategy can be used over and over. This is ideal for a young couple that buys a run down house and moves into it while they fix it up. They would then sell the house after living there for at least 2 years, and pay no taxes on the gains (up to the limits listed above). Then they can buy another run down house and do it all again.
Gifts you receive. Any gift tax is payable by the person who makes the gift. The recipient gets the gift free and clear of tax.
Money you borrow. Normally, borrowing is not a taxable transaction. But you’ll be taxed if you borrow from your IRA, if you borrow more than $50,000 (or half your account) from your company pension fund, or, in some cases, if you get an interest-free loan from your company or a family member.
IRA rollovers. No tax is payable on a lump-sum distribution that is received from a company pension plan if you put it into an IRA within 60 days. (Tax will be withheld, however, if you don’t transfer the money directly from the company plan to the IRA trustee.) You can also take money tax-free from your IRA if you roll it over within 60 days into another IRA.
Inheritances. Beneficiaries don’t pay federal estate tax on anything they inherit – the estate pays any tax that’s owed. Moreover, if you inherit property that’s increased in value, you receive it at its “stepped-up” estate value. you would then use this value, rather than the original cost, to calculate your taxable gain if you sell the property.
Life insurance proceeds. The beneficiary gets the full amount tax-free. But the estate may be liable for estate tax on the proceeds.
Property settlements between spouses in divorce or separation proceedings. The recipient owes no tax at the time property is transferred. (There may be a tax later if property is sold at a gain.)
Child-support payments. They are tax-free to the recipient. Alimony payments to a spouse or ex-spouse, however, are taxable to the recipient.
Money recovered in lawsuits for personal injuries or defamation of character. But money recovered to compensate you for lost wages or other income is taxable.
Workers compensation payments.
Disability payments from accident and health-insurance plans. The payments are tax-free if you paid for the insurance, but taxable if your employer paid the premiums.
Federal income tax refunds. (But any interest the IRS pays you on a late refund is taxable.)
State income tax refunds…provided you didn’t itemize deductions on your federal return for that year.
Municipal bond interest. Generally, it’s exempt from federal income tax and sometimes from state and local taxes, as well. However, interest from some “private purpose” municipal bonds is subject to the Alternative Minimum Tax. And, municipal bond interest is taken into account in figuring your income level to determine whether any of your Social Security benefits are taxable.
“Like-kind” property exchanges-swaps of tangible property or real estate are tax-free if the properties are of similar nature.
Vacation home rental. If you rent your vacation place out for 14 days or less, the income is not taxed.
Kids’ wages. Dependent children can earn up to the annual standard deduction amount for single taxpayers which is $6,300 in 2016.
Kids’ investment income. Dependent children can receive up to $600 of unearned income tax-free (dividends, interest, etc.).
Scholarships and fellowships granted on or before August 16, 1986, to candidates for degrees, are tax-free. But, if granted after that date, they are tax-free only to the extent they are used to cover tuition, fees, books, and course equipment. Grants for room and board, etc., are taxable.
Fringe benefits from your employer. Examples: Health insurance, pension contributions, up to $50,000 of life insurance coverage, up to $5,000 of death benefits, education expenses (up to $5,250 a year), certain child- and dependent care, legal services under group plans, and supper money.
Meals and lodging, if furnished by your employer for the employer’s convenience-for example, to enable the employee to remain at the workplace.