Depending on your client’s unique situation, not all income is subjected to taxation when they file with the Internal Revenue Service (IRS). While only a small percentage of income types are nontaxable, there are some sources that are not subject to any federal or local government taxes.
These tax-exempt income sources include the following, which are paid from pooled government accounts:
- Supplemental Security Income (SSI)
- Veteran benefits
- Welfare benefits
- Federal tax returns
Additional sources of tax-exempt income include:
- Money from qualified investments, such as RothIRA distributions and municipal bonds
- Academic scholarships not used for room and board or personal expenses
- Gifts and inheritances
- Vacation rental income
- Some interest
- Sale of a principal residence
- Life insurance payouts
This list is not comprehensive, and many nontaxable sources are only left untaxed under very specific circumstances, so your client will lean on you, the tax preparer if they have questions about the taxability of their income sources. For example, the vacation rental income listed above is only nontaxable if a property was rented out 14 days or less in a calendar year. Also, your clients with higher tax-exempt interest may not be able to qualify for certain other tax breaks as a result.
Filling Out Form 1040
Thanks to the Tax Cuts andJobs Act of 2018, there is now only one smaller Form 1040 that all taxpayers have to use that has replaced the original Forms 1040, 1040A and 1040EZ. The new1040 requests the same information as the previous ones but in a different format – as well as introducing more schedules. On this new 1040, Americans must report tax-exempt interest and income on Line 18.
Source: taxslayerpro
