What Is the Income Exclusion Rule?
The income exclusion rule sets aside certain types of income as non-taxable.
There are many types of income that qualify under this rule, such as life insurance death benefit proceeds, child support, welfare, and municipal bond income. Income that is excluded is not reported anywhere on Form 1040.
Key Takeaways
- Income excluded from the IRS's calculation of your income tax includes life insurance death benefit proceeds, child support, welfare, and municipal bond income.
- The exclusion rule is generally, if your "income" cannot be used as or to acquire food or shelter, it's not taxable.
- Municipal bond income is only excludable up to a point.
Understanding the Income Exclusion Rule
Generally, there is no limit to the amount of this type of income that can be received. One exception is municipal bond interest, which may be counted back as an alternative minimum tax preference item.
Income that is excluded from taxation is generally accorded this status as a measure of relief for the recipient (or else as the result of powerful lobbying, as is the case with life insurance).
Income Exclusion Rules and Social Security
For Social Security purposes, not everything an individual receives is consideredincome. For the most part,if anitem received cannot be used as, or to obtain, food or shelter, it will not be considered as income.
For example, if someone pays an individual's medical or automobile repair bills, or offers free medical care, or if the individual receives money from a social services agency that is a repayment of an amount he/she previously spent, that value is not considered income to the individual.
In addition, some itemsconsidered to be income are excluded when determining the amount of an individual's benefit.A detailed list of social securityincome exclusions can be found in sectionV.B of the SSI Annual Report.
Principal EarnedIncome Exclusions
- The first $65 per month plus one-half of the remainder
- Impairment-related work expenses of the disabled and work expenses of the blind
- Income set aside or being used to pursue a plan for achieving self-support by a disabled or blind individual
- The first $30 of infrequent or irregularly received income in a quarter
Principal UnearnedIncome Exclusions
- The first $20 per month
- Income set aside or being used to pursue a plan for achieving self-support by a disabled or blind individual
- State or locally funded assistance based on need
- Rent subsidies under HUD programs and the value of food stamps
- The first $60 of infrequent or irregularly received income in a quarter
Income Exclusions for Employer-Paid Health Insurance
One of the biggest tax exclusionsin the U.S. is the exclusion that allows workers who get job-based (or "employer-paid") health insurance coverage not to pay taxes on the value of those policies andemployers to deduct the cost as a business expense.
The exclusion is projected to cost the Treasury at least $303 billion in 2021, according to Congress’ Joint Committee on Taxation and the Congressional Budget Office.
FAQs
The income exclusion rule sets aside certain types of income as non-taxable. There are many types of income that qualify under this rule, such as life insurance death benefit proceeds, child support, welfare, and municipal bond income. 1 Income that is excluded is not reported anywhere on Form 1040.
What is the income exclusion rule? ›
Conclusion. The IRS does not calculate your income tax using income from municipal bond revenue, child support, life insurance death benefit money, or welfare. The income exclusion rule states that money that cannot be used to pay for food or housing is not taxable.
How does an exclusion affect a person's taxes? ›
Exclusion in taxes reduces the amount of money an individual puts in the record as their gross income. As a result, it lowers the total amount of taxes a person has due in remittances to the state for revenue purposes.
What is the exclusion rule for taxes? ›
In simple terms, this capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence.
How do I know if I qualify for foreign earned income exclusion? ›
A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
What is the maximum earned income exclusion? ›
Every year, the FEIE exclusion amount is adjusted for inflation. For income earned in 2023, the FEIE maximum exclusion amount is $120,000 and has been set to increase to $126,500 for the 2024 tax year. In the table below, you can see the FEIE exclusion amounts for every year since 2018.
Why are there income exclusions? ›
Income Exclusion Rules and Social Security
The goal of the program is to pay for an individual's most basic needs, such as food and shelter. Some items that are considered income by the SSA are excluded when determining the amount an individual has to pay.
What are the side effects of exclusion? ›
Research show that social exclusion can lead to the following mental health challenges:
- Depression.
- Anxiety.
- Poor sleep quality.
- Loneliness.
- Cognitive decline.
- Memory problems.
Both deductions and exemptions are beneficial but in different ways. Deductions are related to certain expenses or investments, while exemptions are specific allowances on your income.
What is the result of exclusion? ›
The outcome of social exclusion is that affected individuals or communities are prevented from participating fully in the economic, social, and political life of the society in which they live. This may result in resistance in the form of demonstrations, protests or lobbying from the excluded people.
Qualifying for the exclusion
You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods.
What does exclusion amount mean? ›
The Annual Exclusion amount is the amount of money that one person may transfer to another as a gift without incurring a gift tax or affecting the unified credit.
Who is exempt from paying federal taxes? ›
Some Americans might be exempt from filing income taxes because they don't meet the income requirements to file, or they're being claimed as a dependent.
How much foreign income is tax free? ›
For the tax year 2022 (the tax return filed in 2023), you may be eligible to exclude up to $112,000 of your foreign-earned income from your U.S. income taxes. For the tax year 2023 (the tax return filed in 2024), this amount increases to $120,000.
How long do you have to work overseas to be tax free? ›
You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during any period of 12 consecutive months including some part of the year at issue. The 330 qualifying days do not have to be consecutive.
Can IRS find out about foreign income? ›
One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act.
What income is excluded from net investment income? ›
Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income. Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes.
What is the 20 income exclusion? ›
Deduction for Taxable Income Up to $182,100 ($364,200 if Married) For 2023, the threshold is taxable income up to $364,200 if married filing jointly, or up to $182,100 if single. If your income is within this threshold, your pass-through deduction is equal to 20% of your qualified business income (QBI).
What is the income exclusion in the US? ›
Limit on excludable amount
For tax year 2024, the maximum exclusion is $126,500 per person. If two individuals are married, and both work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion.
What does retirement income exclusion mean? ›
The exclusion of taxes on retirement income, specifically dividends and capital gains, means that the double taxation is eliminated for some capital income.
