When it comes to taxes and back taxes, there is certain income and assets that the IRS can’t tax or even levy to offset your tax debt. This post reviews the income and assets excluded from IRS taxes and from an IRS levy.
Benefits IRS Can’t Tax
Veterans Benefits
Military benefits paid to veterans or their families are excluded from taxable income. Military veterans benefits include education and training, disability payments, pension payments, insurance proceeds, death gratuities, and more.
Welfare Benefits & Public Assistance
Welfare and public assistance related benefits, including economic self-sufficiency help provided by Temporary Assistance for Needy Families (TANF program) and additional nutrition benefits provided by the Supplemental Nutrition Assistance Program (SNAP program), are not taxed by the IRS.
Life Insurance Death Benefits
Death benefits received as a beneficiary of a life insurance policy are not included as taxable income, meaning that the beneficiary does not need to report these life insurance proceeds. If interest is paid on the death benefits, however, the interest is taxable and must be reported.
Certain Retirement Plan Benefits
Certain pension and retirement plan benefits that your employer contributes to a qualified retirement plan fund aren’t considered income for the tax year the contribution is made.
Payments IRS Can’t Tax
Casualty Insurance Payments
Insurance payments for casualty losses, like car accidents, floods, and fires, aren’t taxed unless the casualty insurance payment is more than the actual loss.
Child Support Payments
Money received from child support payments is exempt from taxes. When calculating gross income to determine whether you need to file a tax return, exclude child support payments received. Child support payments can’t be deducted by the parent who is making payments nor taxed for the parent who is receiving payments.
Disaster Relief Grant Payments
The Disaster Relief and Emergency Assistance Act exempts post-disaster relief grant payments from taxes. This payment is intended to help you meet your daily expenses, such as medical, housing, and transportation expenses.
Foster Care Payments
Foster care providers receiving foster care payments from the state, local government, or foster care placement agency do not have to include these payments in gross income for IRS taxes.
Lawsuit Settlements (Physical Injury or Sickness, Emotional Distress or Mental Anguish)
The compensatory damages awarded as part of a personal injury or sickness claim are not considered gross income. These settlements are therefore not included in taxes.
SSI Payments
The Social Security Administration offers monthly benefits to disabled, blind, and elderly low-income individuals. The payments, which come from U.S. Treasury general funds, are not taxable.
State Crime Victims Fund Payments
Payments distributed to victims as victim compensation funds are excluded from being taxed by the IRS.
Workers’ Compensation Payments
Workers’ compensation that employees receive for an employment-related injury or illness is exempt from taxes.
Gifts & Inheritances IRS Can’t Tax
Gifts
If a gift is less than $15,000 (2021 tax year) or less than $16,000 (2022 tax year), the gift is excluded from taxes. If the gift exceeds the yearly IRS gift exclusion amount, the gift giver (or doner) will owe gift tax but not the receiver.
Inheritances
There is no federal inheritance tax. However, estates must pay federal estate tax. Estate taxes are paid by the estate when the estate’s value is more than $11.7 million (2021 tax year) or $12.06 million (2022 tax year).
Other Income IRS Can’t Tax
Combat Service Pay
If you’re eligible for military tax benefits and served in an IRS recognized combat zone, like Afghanistan, your income may not be taxed by the IRS as long as you’re a member of the US Armed Forces and were paid while serving in a combat zone or hospitalized because of your service in a combat zone.
Gambling Income (when losses greater than winnings)
Gambling income will only be excluded from taxes if your total losses exceed your total winnings for the tax year. Your gambling winnings are taxable if they surpass your losses. In this case, report your winnings on your tax return as income.
Home Rental Income (when rented less than 15 days per year)
You are not required to report home rental income on your tax return if you rented your home for less than 15 days during the tax year. If you rent your home more than 15 days, however, you must include your entire home rental income amount when filing taxes.
Municipal Bonds Interest
Interest on certain municipal bonds that you receive from the state, city, county, or other government entities are generally exempt from federal income tax. The payments could also be exempt from state and local taxes if the recipient resides where the bond was issued.
Income and Assets IRS Can’t Levy
Child Support Payments
IRS can’t levy the money needed to comply with child support payments from salary, wages, or other income.
Furniture and Other Household Items
Furniture, household items, and other personal effects when they total less than $6,250 are exempt from IRS levy.
Military and Railroad Pension Benefits
Annuity or pension paid under the Railroad Retirement Act or to a person on the military honor roll is an IRS levy exemption.
Public Assistance Payments
IRS can’t levy SSI payments or state and local government public assistance and other welfare programs.
School Books and Clothing
School books and apparel (that’s inexpensive and not considered a luxury) are exempt from an IRS levy.
Service-Connected Disability Payments
Disability payments to military personnel injured while on active duty or during training are IRS levy exemptions.
Unemployment Benefits
IRS can’t levy unemployment benefits paid to an individual.
Work Equipment and Business Books
Professional books and tools of trade for a business or profession when they’re worth less than $3,125 in total are exempt from IRS levy.
Workers’ Compensation
Workers’ Compensation paid to an individual injured at work is an IRS levy exemption.
Many individuals assume the IRS can tax or levy all income. However, as discussed above, there are some taxable income and IRS levy exemptions.
If you are in doubt about whether income can be taxed or levied, schedule a free call with us today, or get started for free below.
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