Exempt Income
Candlefocus EditorExempt income is not subject to taxation, meaning that it is not included in taxable income when filing tax returns. This is an important benefit that can result in a significant savings annually in taxes. Understanding which income falls into this category is essential for any taxpayer.
At the federal level, certain types of income may qualify as exempt income while they may be subject to taxation at the state level. For example, income generated through certain types of investments can qualify as exempt income, such as income generated through interest earned on municipal bonds. Additionally, distributions from both Roth 401(k)s and Roth IRAs are also classified as exempt income and are not subject to taxes when withdrawn.
Exempt income may also take the form of certain types of benefits. Employer-sponsored supplemental disability insurance and most benefits from employer-sponsored health insurance plans are typically tax-exempt. Life insurance death benefits are exempt from taxes, providing a tax-free source of income to the beneficiary. Additionally, Social Security benefits, veterans' benefits, and some types of special pension plans qualify as exempt income.
In sum, understanding the different forms of exempt income is an essential part of managing finances. Tax-exempt income can provide a valuable form of financial savings and should be taken into account when calculating tax returns. Taking the time to understand which income qualifies as tax-exempt can ensure that you reap the full benefits at tax time.