16 Tax-Free Income Sources You Didn’t Know About

It turns out the old saying that only death and taxes are certain isn’t entirely true — and that’s actually a good thing.

While the government takes a portion of your income to fund public projects and infrastructure, not all types of income are subject to taxation. Every time you check your paycheck, you see deductions for taxes, but there are certain types of income that the IRS won’t tax, allowing you to get ahead financially.

Here are 16 types of income that are exempt from taxes:

1. Adoption Assistance

If your employer offers paid adoption assistance, it’s considered nontaxable. For 2024, the maximum tax-free amount is $16,810 per child. However, specific rules apply to what qualifies as an eligible expense, including adoption fees and court costs.

2. Alimony

Alimony payments you receive are not taxable. However, if you’re making alimony payments and your divorce occurred after January 1, 2019, those payments are no longer tax-deductible, per the Tax Cuts and Jobs Act.

3. Child Support

Child support payments are not considered taxable income. The IRS doesn’t classify child support as income, and you cannot deduct it on your tax return.

4. Credit Card Rewards

Most credit card rewards like cashback, miles, or points are viewed as rebates rather than taxable income because you must make a purchase to earn them.

5. Disability Insurance

If you pay for disability insurance yourself, the benefits you receive are not taxable. However, if your employer covers the premiums, any disability payouts will be subject to tax.

6. Disaster Assistance

Payments from the Federal Emergency Management Agency (FEMA) for disaster relief are tax-exempt, provided they are not reimbursed by insurance or other means.

7. Education Assistance

Up to $5,250 of education assistance provided by your employer annually is tax-free. These benefits shouldn’t be counted as part of your income on your tax return.

8. Scholarships

Academic scholarships are tax-exempt if they’re used to pay for tuition, fees, or course-related expenses and if you’re a degree candidate at an eligible institution.

9. Financial Gifts

Money or property you receive as a gift is generally not subject to tax, up to the 2024 exclusion cap of $18,000 per person. However, income from gifted assets like stocks is taxable.

10. Foster Care Payments

Payments from state or eligible sources to care for a foster child are not taxed. However, if you receive payments to maintain an area of your home for emergency foster care, it must be reported as income.

11. Health Savings Accounts (HSAs)

Contributions to HSAs, whether made by you or your employer, are excluded from your gross income. HSAs are a great tax-advantaged tool to cover medical expenses.

12. Home Sale Capital Gains

If you sell your home, you may exclude $250,000 (or $500,000 for joint filers) of capital gains, provided you’ve owned and used it as your primary residence for at least two of the past five years.

13. Inheritance

Inheritances aren’t subject to income tax, but large estates might face estate taxes. For 2024, the basic exclusion amount for estates is $13.61 million.

14. Life Insurance Payouts

Life insurance payouts are typically not taxable, though any interest earned must be reported. If you receive payments due to terminal illness or to cover long-term care, these are usually tax-exempt.

15. Roth IRA Income

Qualified distributions from Roth IRAs are not taxed, offering a great retirement income source with no tax burden.

16. Workers’ Compensation

Workers’ compensation benefits are tax-free, even if they arise from workplace injuries or illness. However, they may impact your taxes if they affect your Social Security benefits.

Bottom Line

While no one enjoys paying taxes, there are legal ways to lower your tax burden. Understanding which types of income are exempt can help ease financial stress and maximize your earnings.

Money-Saving Tips

Regardless of your current financial situation, there are always ways to improve your finances:

• Focus on paying off debt. Tools like balance transfer credit cards and debt counseling can accelerate the process.
• Consider earning extra income with a side job to create financial breathing room.
• Cut expenses, especially on items like auto insurance and groceries, where savings can quickly add up.

These tips can help you take control of your finances and make the most of tax exemptions.

Source: FinanceBuzz