This article was last edited on August 2, 2021.
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.
What kind of income is tax-exempt?
Tax-exempt income sources include:
- 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
Tax-exempt interest and income is entered on Line 18. Read our guide to entering the tax-exempt income, non-deductible expenses, distributions, and other items from Schedule K-1 (Form 1065) into the TaxSlayer Pro program.