Incomes Not Subject to Federal Income Tax

June 25, 2011 by  Filed under: Taxes 

Federal income tax is levied on almost all incomes received by every taxpayer. All incomes are to be reported on one’s tax return form and the applicable tax rate is applied on the total amount of income to determine the taxes due. However, there are certain income types that are not subject to Federal Income taxation. Some of these incomes are:

Distributions from a Roth IRA

A Roth IRA is a retirement fund in which contributions are taxed at the applicable income tax rate, but the withdrawals from the fund are tax free. In other words, the contributions to a Roth IRA are done after taxation. However, proceeds after retirement are tax-free, irrespective of the amount. This is in contrast to traditional IRA accounts, where the contributions to the retirement funds are tax deductible, but the proceeds from the fund are taxed.

Child Support

Payments for child support are not taxed on both ends. In other words, the person providing the child support is not taxed and the guardian of the child or children receiving the child support is also not taxed. No tax reporting is necessary for the child support funds. This is in contrast to alimony payments, where the person receiving the alimony has to pay Federal Income Taxes on the amount.

Death Benefit of an Insurance Policy

Most life insurance policies are tax-free for the death benefit. This means that no Federal Income Tax is applied on the proceeds of the life insurance policy. Death benefit proceeds from health insurance policies, accident insurance policies, and endowment life insurance policies are also income-tax free. However, the beneficiaries of the death benefit may pay an Estate Tax if the amount of the proceeds qualifies.


Cash and other gifts with a monetary value are also not subject to taxes. Therefore, if you receive a gift from a friend or relative, you are not required to disclose the gift or pay taxes on the gift. However, the person providing the gift may be liable for a Gift Tax. From tax year 2010, every taxpayer has a gift cap of $5,000,000.00 for his or her whole lifetime (that he or she can give away tax free). Beyond this cap, the taxpayer is expected to pay a Gift Tax for gifts given if the value of the gifts to a specific individual exceeds $13,000.00 per year.

Return on Capital

Any investments you put into a fund or any other investment vehicle is not subject to taxes on withdrawal. The only amounts that are taxable are the growth on the investment (capital gains) and any interests or dividends from the investment. The withdrawal from the investment is called “return on capital.”

Federal Tax Refund Check

Federal tax refunds are not subject to Federal Income Tax. Therefore, if you get to receive a refund check from the IRS, you will not pay taxes or report it as an income in the subsequent tax year’s returns. However, state tax refunds are subject to Federal Income Taxes. When you receive a state tax refund check, you are provided with a Form 1099-G and are expected to report the refund as income for the next year’s tax return.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. / Tel:888.321.6188

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