Exempt income, such as retirement funds, gifts, and government-provided income, does not need to be deducted from taxes. Government payments, municipal bonds, and some scholarships are also exempt.
Exempt income is any money earned that does not need to be deducted from taxes. The reasons for this vary between different forms of income, but the exemption is intended to help taxpayers by providing additional money for daily needs. Money earned from a job or stocks is considered taxable income. However, things like retirement funds, municipal bonds, gifts, and government-provided income are exempt from deducting taxes.
One of the most common forms of exempt income comes from government payments. A tax exemption is possible on money from welfare, workers’ compensation, and veteran’s benefits. These are most likely not taxable because they already come from the same government that is collecting taxes and also because this money is meant to help those who need additional financial support. Eliminating a portion through taxes would be counterproductive.
Another government-related form of exempt income is the payment of municipal bonds. A civil project undertaken by a government, such as a bridge or highway construction project, often requires citizens to purchase municipal bonds to help cover expenses. These bonds work like a coupon, because after a designated period of time, the buyer can return the bond and receive the initial investment money, and usually interest as well. Money earned by delivering a bonus is not taxable.
Gifts are another form of earnings that are considered exempt income. Money given, for example in a birthday card, is not taxed by the government. However, in the United States, gifts that exceed $10,000 US dollars are subject to tax. Also, in most cases, inheritance money is also not taxed when a sum of money is designated to a beneficiary in a will.
Retirement funds are also not taxable in most cases. Government-sponsored retirement plans, such as United States Social Security, are considered exempt income. Also, many privatized retirement plans avoid being taxed, such as a Roth IRA. However, some pretax retirement benefits are taxable, so it is always best to consult with a tax advisor.
Finally, one of the most commonly ignored forms of exempt income comes in the form of school aid. Some scholarships and fellowships do not have taxes eliminated in many cases. A basic rule of thumb is if, in the United States, for example, the scholarship requires the recipient to complete tax forms, such as a W-2, then it is not considered exempt income.
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