Gross income, at the start of the federal income tax formula, includes many types of income. A whole assortment of income is considered taxable by the federal government, such as wages, gains made on property sold, interest income, and alimony received. Fortunately, some income items may be excluded from the gross income calculation. It’s safer to say the list of gross income exclusions is shorter than what is taxable. Utilizing exclusions properly may help in your income taxes. Below is a list of several notable exclusions from gross income.
Principal Home Sale Exclusion – The capital gains made on the sale of a residence may be excludable up to $500,000 (married filing, jointly). However, several criteria must be met to be excludable, such as the property must be the principal residence of the taxpayer and certain occupancy timeframes must be met (check our article for more info).
Foreign Earned Income Exclusion – Income earned while working abroad may be excludable from gross income, but it must meet either the bona fide residence test or the physical presence test for earnings and other income made overseas to be excludable.
Gifts & Inheritances – Gifts received are generally considered excludable from gross income. However, if the gifted item is later used to produce income, the gift may be considered taxable. Donors of gifts may be required to pay a gift tax if the value of the gifted item passes a certain threshold.
Life Insurance Proceeds – Proceeds received by a beneficiary are generally not included in gross income if the amounts are paid due to the death of the insured person.
Retirement Income (such as social security) – A portion of retirement income may be excluded from gross income, but the amounts may depend on your filing status and sources of income. For social security benefits, up to 85% of it may be taxable.
The option to exclude certain kinds of income can help lower your gross income, and ultimately what you may owe on your tax bill. Utilizing exclusions and tax credits can help both individuals and businesses keep their tax bills reasonable. As a CPA firm focused on helping clients with their accounting & tax needs, MiklosCPA also enjoys sharing these “good-to-know” articles for our visitors and those wanting to learn more of our services. Follow our social media pages for future articles like this one and other interesting tax tidbits.