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
Key Takeaways
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 the foreign income exclusion work? ›
The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.
What is the maximum amount of income exclusion for foreign income? ›
However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023). In addition, you can exclude or deduct certain foreign housing amounts.
What is the general income exclusion? ›
General Income Exclusion: SSA will exclude the first $20 of earned or unearned income a person receives. Earned Income Exclusion: SSA will exclude the first $65 a person earns from working.
How much is the earned income exclusion? ›
The foreign earned income exclusion (FEIE) allows you to exclude up to $126,500 of your foreign income plus up to $37,950 in qualifying housing expenses on your U.S. tax return in 2024.
What is the basic exclusion amount for the IRS? ›
Federal Exemption Amount. The amount which can pass free of federal estate, gift and generation-skipping taxes (“the federal basic exclusion amount”) has increased in 2024 from $12.92 million to $13.61 million per person.
How to avoid US tax on foreign income? ›
Form 2555 is the key form for claiming the Foreign Earned Income Exclusion (FEIE). To qualify, you must meet the following criteria: Foreign residence or physical presence test. You must pass either the bona fide residence test or the physical presence test.
How much foreign income is tax free in the USA? ›
Each year, the limit on how much of your foreign-earned income may be exempt is adjusted for things like inflation. For the tax year 2022, the limit was $112,000 per person. For 2023, the limit was increased to $120,000 per person.
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.
For individual filers, calculating federal taxable income starts by taking all income minus “above the line” deductions and exemptions, like certain retirement plan contributions, higher education expenses, student loan interest, and alimony payments, among others.
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 difference between a deduction and an exclusion? ›
An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.
What is the income inclusion rule? ›
Income inclusion rule: determines when a company's foreign income should be included in the parent (main) company's taxable income.
What is the income exclusion for capital gains? ›
Use the Internal Revenue Service (IRS) primary residence exclusion, if you qualify. For single taxpayers, you may exclude up to $250,000 of the capital gains, and for married taxpayers filing jointly, you may exclude up to $500,000 of the capital gains (certain restrictions apply).1.
