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Wilmington NC CPA Accounting Firm discusses Non Taxable Income | Form 1040 Tax Preparation

non taxable income discussed by Wilmington NC CPA accounting firm

Gary Bode, CPA and tax accountant: most IRS issues have conditions and quirks. If you'd like a free initial consult, please call us at 399-2705.

Most income is taxable for Form 1040 tax preparation.  But there is a broad range of non-taxable income too.  And even non taxable income has to be entered as informational data, usually into the left, textual, column of Form 1040.  The IRS may not tax you on it, but they generally want to see it!

Big News:  The first $2400 of unemployment income was non taxable in 2009, but that provision is expired in 2010.  This is a cash flow trap.  Folks on unemployment usually opt out of with holding taxes from it and then get hit with a large tax liability during Form 1040 tax preparation.

Some employee benefits are non taxable.  We don’t discuss them here because they generally translate into your Form W-2 and are thus more of an employer payroll processing issue.

Here are examples of non taxable income.  It is not comprehensive.  Like all IRS tax preparation issues, there are conditions and quirks.  Specifically, you should not rely on this post to be definitive and reading it does not constitute a CPA-client relationship with us.  Augment your understanding with IRS Publication 525 at IRS.gov and/or consult with your current CPA or tax accountant.  If you’d like a free consult with a tax accountant in a Wilmington NC CPA firm, please call us at 399-2705.

  • Adoption Expense Reimbursements for qualifying expenses.  Remember the Adoption Credit is available for you kind hearted folks too.  In the past that could bring your tax liability to zero.  Now it can generate a tax refund!
  • Child support payments.  The payer pays the tax, but the custodial parent receives them tax free.  This is different than Alimony in which taxable income is transferred from one ex-spouse to another.  We usually look at the underlying Court order to be certain of how to handle both issues.
  • Gifts, bequests and inheritances.  As one example, receiving moderate annual gifts can fall under the gift exclusion provision, currently $13,000.  A married couple can thus each give $13,000 to, say, an adult child, for $26,000 a year total, without tax consequence to the parents or off spring.
  • Workers’ compensation benefits.  Like when you’re injured on the job and Workman’s Compensation insurance pays the medical bills.
  • Compensatory Damages awarded for physical injury or physical sickness.  Again we look at the underlying court documents to see if the structure of the settlement fits IRS guidelines.
  • Welfare Benefits
  • Cash Rebates from a dealer or manufacturer.  These are actually a flashy way to offer discounts, so it makes sense they’re not taxable.
  • Tax exempt interest.  The usual example is municipal bonds where this tax provision acts as an incentive to support public infrastructure.
  • Foreign Earned Income:  often this is reportable but not tax deductible if you live in a foreign country.

Here’s another class of income which can be non-taxable for tax preparation purposes, and the text is pulled directly from an IRS promotional E-Mail.

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

  • Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
  • Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
  • Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive.  We’re a CPA Firm in Wilmington NC offering a free initial consult with a tax accountant.  Please read a few of our posts to obtain a feel for our expertise, proactive attitude and commitment to customer service.  While we specialize in small business tax preparation, we also prepare Form 1040 when issues or comfort level preclude self preparation.  Of course, we offer other services too like QuickBooks training, supervised bookkeeping, financial accounting, business consulting etc.  Please give us a call at (910) 399-2705.

Publication 525, Taxable and Nontaxable Income

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