People always wonder about what is taxable and what not taxable income is. The IRS has issued one tip among a series of tips they typically issue every season. That tax tip is designated as taxable and nontaxable income. May be we should start with items that are not taxable. That it is an optimistic note to start with.
Is Child Support Taxable?
Child support has two parties. The part that gives and the part that takes. For the part that takes or the recipient of child support it is a non-taxable transaction. That means if the mother receives child support for her children she does not have to claim this as taxable income. The payer of the child support or the father in this case cannot claim a tax benefit either. So the government stands neutral on child support as far as collecting or paying money to taxpayers.
Is Inheritance Taxable?
Generally speaking inheritance is not taxable. If you inherit money above certain amounts the amount may be subject to estate tax, not income tax. For the difference between estate and income tax discuss this with your CPA or your tax attorney.
Sometimes you may inherit money from a 401k for example. That money was supposed to be taxed when the deceased cashed it. The person who inherits this money would step in the shoes of the original owner and pay the tax on the 401 k. The rest of the money in the inheritance is tax free.
Are Damage Awards Physical Injury or Sickness Taxable?
Damage awards for physical injury or sickness is not taxable. Damage for mental anguish is taxable. Your CPA or tax attorney must read the contract awarding the damage in order to treat the amount you receive properly.
Are Gifts Received Taxable to Recipient?
They are not. The gift donor however is the one that should pay the tax on the gift. So before you give gifts to your children and someone else you need to consider the tax ramifications of doing so. One mistake I see often for self-employed who have more latitude for tax planning and income shifting opportunities (legally of course) is that they may give gifts that are not tax deductible to them but rather generate tax liability when in fact they can hire their children in the operation and pay them compensation that is tax deductible. So not only will they have a tax deductible cash outlay but they also reduce the tax liability on this amount since the children are assumed to be in a lower tax bracket.
What About Proceeds From Life Insurance?
Typically an amount you collect from life insurance is not taxable. Most people think otherwise. So if you are the beneficiary of a life insurance policy and you receive the cash you don’t have to report that cash as income. The only time life insurance proceeds are taxable is if it had a redeemable cash value that you redeem. Any amount beyond the cost in the policy is taxable.
Other Non-Taxable Income
There are other non-taxable income items such as welfare benefits, cash rebates from dealers and reimbursement for qualified addition expenses.
Summary: Child support, damages awards, inheritance, gifts and life insurance proceeds are examples of non-taxable income.