Taxes are really very confusing.
There are some deductions that people think they can claim but in reality, they can’t.Â I’m sure that you’ve been hearing different stories from your friends or co-workers regarding the deductibility of some deductions.
It works the same way with reportable income: Determining which income is taxable or not can really be very confusing for a lot of people.Â There are some income that people think are not taxable but they actually are.
On this article, we will be discussing income that some people think are taxable but they are actually not.
Below are the 7 Income that you may think are taxable but actually aren’t:
1. Life Insurance Proceeds
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy is turned over to you for a price. This is true even of the proceeds were paid under an accident of health insurance policy or an endowment. However, interest income received as a result of life insurance proceeds may be taxable.
- Example 1: Your father put you as the lone beneficiary of his life insurance worth $500,000. When he dies, the money you collected from the insurance company is not taxable to you.
- Example2: Have you heard of advertising where companies or individuals wanted to purchase your life insurance? When you die, the insurance proceeds that these companies or individuals collect will be a taxable income to them when they purchase the policy from you.
2. Worker’s Compensation
The money you received as a result of an occupational sickness or injury are not taxable income if they are paid under a worker’s compensation act or a statute in the nature of a worker’s compensation act. The tax exemption is also applicable to your survivor.
- Federal Employees Compensation Act – If you receive money under this act as a result of personal injury or sickness, the payments are not taxable. This includes payments to your beneficiaries in case of death. However, any income received under this act that represents “continuation pay” will be taxable for up to 45 days while a claim is being decided.
3. Welfare and Other Public Assistance Benefits
Income received from governmental benefits based upon need are not taxable. This may include cash aid assistance, state aid medical, food stamps, section 8 housing, etc. You must include in income any welfare payments that are compensation for services or that are obtained fraudulently. Some examples of government benefits are:
- Disaster relief grants/payments – not included if grant/payments are made to help you meet necessary expenses or serious needs for medical, dental,housing, personal property, transportation, or funeral expenses.
- Mortgage Related Assistance – Payment received for mortgage relief assistance such as Home Affordable Modification Program (HAMP) or payments made under section 235 of the National Housing Act are not taxable.
- Nutrition Program for the elderly – food benefits under this program are not taxable.
- Old-age, survivors and disability insurance benefits (OASDI) – payments under section 202 title II of the Social Security Act are not taxable. Applicable to old-age insurance benefits, and insurance benefits for the spouse, children, and parents as well as the lump-sum for death payments.
4. Child Support Payments
Child support payments are not taxable to the recipient. Because of this, child support paid by an individual is also not deductible on the supporter’s return. However, alimony payments are the ones that are taxable to the receiving ex-spouse.
5. Disability Income Where You Pay The Premiums Yourself
If you pay the entire cost of a health or accident insurance plan yourself, any amounts you receive for your disability as income are not taxable. However, if both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employerâ€™s payments is reported as income. On the other hand, if you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
6. Court Awards and Damages for Personal Injury or Physical Sickness
You Â may have been involved in a car accident or any accident where you may have been awarded compensation for lost wages, personal injury or sickness, punitive damages, emotional distress, etc. The tax law states that ONLY award for personal injury or physical sickness ARE NOT TAXABLE.
7. Scholarships and Fellowships
The amount received from qualified scholarship or fellowship by a student pursuing a college degree are not taxable if these amounts are to be used for tuition and fees to enroll at or attend an educational institution, school activity fees, books, supplies, and equipment required for courses at the college attended. However, any amounts used for room and board will be included in your income and will be taxable.