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Saved from the Jaws of the IRS: 7 Non-Taxable Sources of Income

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Feb 26th 2015
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In general, you’re taxed on income from jobs, savings, investments and most other sources. There, are, however, exceptions; counting them as income will cost you valuable dollars. Here are some items that remain beyond the reach of the Internal Revenue Service. Be sure to carefully separate out income, so you're not inadvertently paying the IRS more than you owe.

Do you give a ride to your neighbor to the same office complex each morning? Car pool payments that you receive from riders aren’t taxed unless they run to more than your expenses.

Child support payments aren’t considered taxable income to the recipient, provided the divorce decree specifically distinguishes these payments from alimony, which is taxable.

Rebates shouldn’t be mistaken for income. A rebate on the purchase of, say, a car isn’t income. It’s considered a reduction of the car's price. (Note, though, that if you use the car in a business, the rebate reduces the available tax incentives, such as depreciation deductions.) Similarly, you aren’t required to report "dividends" on life insurance policies that actually are a return of some of your premium payments.

Jury duty pay is taxed. But you’re relieved of taxes on the jury pay if you must turn it over to your employer because your employer continues to pay your salary while you serve on the jury. Report the pay as "other income" on Line 21 of Form 1040, and claim an offsetting deduction for the amount turned over to your employer on Line 36. Write “jury pay” and the amount on the dotted line next to the total of adjustments to income on Line 36.

A profit on the sale of your house or condominium qualifies for a special tax break. You can "exclude", meaning escape taxes, on up to $250,000 in profit on home sales for single filers and up to $500,000 for married couples filing jointly. What if your profit is greater than the exclusion amount of $250,000 or $500,000? The excess is taxed as a long-term capital gain, plus applicable state income taxes. To qualify, you must own and use the property as your principal residence or main home (IRS-speak for a year-round dwelling) for periods aggregating at least two out of the five years that end on the sale date, and at least two years must have elapsed since you last used the exclusion.

Vacation-home rentals also come under special rules. If you rent out your cottage or condo for less than 15 days during the year, you don’t have to declare any of the income you receive. This unique exemption provides a valuable loophole for less-than-15-day landlords with vacation homes (or year-round homes, for that matter) near annual events where rents soar for short periods—Indianapolis for the Memorial Day race, Louisville during Derby week, and Augusta during its Masters golf tournament, to cite some examples. But go beyond the less-than-15-days limit and all the rental income becomes reportable. Check the rules carefully because the tax collectors can be sticky.

And, of course, there's the big one, which almost everyone knows about but can be forgotten or confused in the pile of tax papers during filing time: Dividends, interest, or other earnings on funds in traditional IRAs accumulate without being taxed. No tax is due until you begin withdrawals from the IRAs, Keogh plans, or similar retirement arrangements. But when you stash cash in Roth IRAs, earnings are never taxed, not even when withdrawn, as long as certain requirements are met.

About the author:

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block’s Year Round Tax Strategies,” available at julianblocktaxexpert.com.

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By sara
Jun 25th 2015 20:12 EDT

On IRA's, can you take a deduction for the management fees charged?

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