Not Everything is Taxed

Legal Reading © Stephen M. Maple 2022

The Internal Revenue Code does not tax everything we receive, at least not yet. This article discusses several exemptions from taxation. This is not an exhaustive list.

Inheritances. When Uncle George dies and leaves you his house and cash, you can be sad about his death but happy that there is no income tax on your inheritance. Indeed, when you sell the house, you can subtract the fair market value of the house at his death from the sales proceeds to compute the tax on sale.
Gifts. All those birthday and Christmas gifts come income tax-free. If your Aunt Georgina gives you stock which has increased in value since she bought it, you are grateful. If you later sell the stock, you can subtract her investment in the stock from the sales proceeds to compute the tax on sale.
Life insurance proceeds. Grandmother Georgette took out a life insurance policy and named you as the beneficiary. When Granny passes away, you receive a check from the insurance company; the proceeds are income tax-free.
Personal injury damages. Accidents happen; people are negligent. For example, if a person is injured by a negligent driver, the money received to compensate for the personal injury is income tax-free. Likewise, workers' compensation injury awards are income tax-free.
Employer-paid group life insurance premiums. If your employer provides group term life insurance, sign up. The first $50,000 of coverage is income tax-free; any premium the employer pays for coverage above $50 thousand will be taxed to you, based on an IRS table.
Gain on the sale of primary residence. Americans move around a lot, so homeowners keep realtors busy. When you sell your house, up to $250,000 of the gain from the sale is income tax free ($500,000 for a married couple).
Food-servers meals. If a food-server receives a free or reduced-price meal for the convenience of their employer while they are working, the value of the meal is income tax-free.
College scholarships. Universities often reduce their sticker price by awarding scholarships. When the scholarship is for tuition, fees, books, supplies, and equipment required for a course, the scholarship is nontaxable. However, scholarships for room or board are taxable to the recipient.
Employee fringe benefits. Employers often pay part of an employee's health insurance; this payment is income tax-free. In addition, employers may provide other fringe benefits, such as education reimbursement, free parking, employee discounts, child care, moving expense reimbursement, and others. Many of these benefits are income tax-free; when you receive your W-2, it will indicate which are reported as income.