Here are some of the more common “excepts”
in the income category – items that are exempt from federal income tax. However, even the “excepts” have “excepts”.
* Cash rebates on items you purchase
from a retailer, manufacturer or dealer, unless the full purchase price of the item
was previously deducted.
* Child support payments. Child support is exempt but alimony is
taxable. Child support payments are not
deductible by the payer, but alimony is.
However, under the new GOP Tax Act alimony received as a result of a
divorce or separation agreement executed after December 31, 2018 – or executed
on or before December 31, 2018, but subsequently modified to include this new
provision – is no longer considered taxable income by the recipient, and is no
longer deductible by the payer.
* Disability insurance payments from
policies paid by the taxpayer with “after-tax” dollars. If the premiums were paid by your employer as
an employee fringe benefit the payments are taxable. In some cases, the payments are partially
taxable and partially exempt. NJ
employees are covered by the state’s Temporary Disability Insurance Benefits
fund. The “premiums” are paid by both
employee and employer contributions.
Part of the benefits paid directly to the employee by the state fund are
taxable. Taxable disability income will
generally be reported on a Form W-2 from either your employer, as would be the
case with NJ state disability fund payments, or the insurance company making
the payments.
* Gifts. A true gift is cash or property given to
someone without the expectation of payment or return. Gifts are never included in taxable income, nor
are they ever deductible, on Form 1040.
The giver of the gift may be subject to the federal Gift Tax – but the
annual gift exclusion is $15,000 (you can give up to $15,000 to any number of
people without having to report it anywhere) and the lifetime exclusion is $11,200,000.
* Inheritances and bequests. However, if you receive distributions from
the pension or annuity account of a deceased person as a beneficiary you may be
taxed on the distribution the same way the deceased person would have been
taxed if the money had been distributed while he or she was alive. You should receive a Form 1099R if a
distribution is fully or partially taxable.
Distributions to beneficiaries from ROTH accounts – IRAs or 401(k)s - are
not taxable.
* Interest from a municipal bond - a
debt security issued by a state, municipality or county – whether received
directly from the issuer or from a mutual fund that invests in municipal
bonds. However tax-exempt municipal bond
income is included in the calculation of taxable Social Security and Railroad
Retirement benefits – so tax-exempt income can effectively be partially
taxed. Income from “private activity
bonds” are included in Alternative Minimum Taxable Income (AMTI) – but the
dreaded AMT is no longer an issue for most taxpayers.
* Legal awards, judgements and
settlements for physical injury or sickness.
Other legal awards, judgements and settlements are usually taxable.
* Most healthcare benefits, unless the
payment is to reimburse you for medical expenses for which you previously
received a tax benefit via a deduction on Schedule A.
* Proceeds from a life insurance
policy paid to a beneficiary. However, if you cash in a life insurance policy
as owner of the policy a portion may be taxable.
* Public welfare benefits.
* Qualified scholarships. However, if
you use some of the money for room and board, or to pay for other personal
expenses, that portion is usually taxable.
* Workers’ compensation benefits
received for an occupational sickness or injury paid under a workers’
compensation act or a statute.
In addition -
* Employee withholdings under a
qualified employer-sponsored Section 125 cafeteria plan, including payments for
health insurance premiums, and contributions to a qualified employer pension
plan, like a 401(k) or 403(b) or 457 plan, are considered “pre-tax” and not
included in the federal taxable wages reported on Form W-2.
* Employer reimbursements for job-related
expenses under a qualified “accountable plan” are not included in taxable income. However, a flat monthly “expense allowance”
that does not require the employee to report and substantiate actual expenses
and return to the employer any excess is fully taxable and included in the
wages reported on Form W-2. And, as per
the GOP Tax Act, employer reimbursements for moving expenses (other than a
qualified military service related move) are now included in taxable
wages.
It is important to remember that items
that are taxable, or exempt, on the federal income tax return may NOT be
taxable, or exempt, on state returns.
TTFN
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