Sometiimes it seems the IRS taxes everything we do. And it is true--virtually all sources of income are taxable by the US government. It can become so overwhelming that we often forget that there some types of income that Congress saw in its wisdom to exempt from tax. Non-taxable income? That's right--and here are some of the biggest items:
1) Being a good samaritan is nontaxable. 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.
2) Child support payments aren’t considered taxable income to the recipient, provided the divorce decree specifically distinguishes these payments from alimony, which is taxable.
3) 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.
4) 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.
5) Selling your home doesn't necessarily mean a big tax bill. 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 (a lower tax rate). 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.
6) Renting your second home tax free? 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.
7) Income generated within an IRA is not taxable. This is the big one that 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. Even this tax can be avoided if you fund a Roth IRA. Earnings for those plans are never taxed, not even when withdrawn, as long as certain requirements are met.