- Days left

Seven Checks You Can Cash Free of Federal Income Tax

Checks you cash free of taxRonald Reagan once famously remarked that the government's take on the economy was, "If it moves, tax it." At tax time, it can feel as though that's true.

Realistically, though, not every dollar you receive is taxable (even though in some circumstances, it may still be reportable). Following are seven checks that you can cash, federal income tax free:1. Life insurance proceeds. Life insurance proceeds might be taxable for federal estate tax purposes, but when it comes to federal income tax, most life insurance contracts are income tax free. The general rule is that life insurance proceeds paid to you as a pure death benefit are not taxable; this is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. The "regular" income rules still apply, however, so that interest on the proceeds may be taxable.

2. Cash gifts. If you're lucky enough to get a cash (or cash equivalent) gift -- no matter the amount -- you can spend it all without paying Uncle Sam. While the person who gave the gift to you might be subject to federal gift tax on the gift, there is no income tax on the gift when you receive it.

3. Roth IRA withdrawals. With a traditional IRA, you get the benefit of income tax deferral on contributions made during your lifetime, but when you withdraw the money, you pay federal income tax. However, it's different with a Roth IRA. You pay the tax on the money contributed to the Roth IRA upfront. That means when you take it out, you don't pay federal income tax on the withdrawals, no matter how much it has grown.

4. Child support. Unlike alimony, which has federal income tax consequences, child support is tax neutral. There's no deduction available to the person paying the support, and there's no income recognized when a person receives child support.

5. Return of capital. We all know that interest and dividends inside of a traditional brokerage account (or other investment account) are generally taxable. But what about money you withdraw from the account that you contributed in the first place? While the dividends and interest are taxable and growth on the initial contribution might be subject to capital gains, the initial contribution can be withdrawn without triggering federal income tax. An investment of capital, no matter what the form, is generally returned to you, federal income tax free.

6. Federal income tax refunds. If you received a state tax refund in 2010, chances are that you also received a form 1099-G to report the refund. While state tax refunds may be taxable to you for federal income tax purposes, federal income tax refunds are not taxable -- whether it's a mere dollar or $54,000.

7. Making Work Pay Credit. The Making Work Pay Credit makes its final appearance for the 2010 tax year (it's been replaced in 2011 by the payroll tax credit). If you received the credit in 2009, it does not affect your 2010 tax return (eligibility for the credit in one year doesn't affect eligibility for the credit in another year). Additionally, the credit is not taxable to you for federal income tax purposes.

A quick reminder: These rules apply to federal income tax only. There may be different rules for your state or local taxing authorities, and other taxes, such as federal estate and gift tax, might also be relevant.

Increase your money and finance knowledge from home

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

Getting out of debt

Everyone hates debt. Get out of it.

View Course »

TurboTax Articles

A Brief History of Income Taxes

Did you know President Abraham Lincoln, one of America's most beloved leaders, also instituted one of its least liked obligations - the income tax? In this brief history of taxes, see the historical events which shaped income taxes in the United States today.

How to Itemize Taxes When Claiming Dependents

Claiming dependents and itemizing deductions is an effective way to save money on your income taxes. Each dependent you claim allows you to reduce your taxable income by one exemption. Get a step-by-step overview on how to take advantage of itemizing your taxes when claiming dependents in this article on tax tips.

What Extra Tax Deductions Should I Make Sure To Take?

The federal government offers tax deductions and credits to reduce taxable income under certain circumstances. There are several that are often overlooked, including deductions for job hunting, caregiver expenses for dependents and children while you work, a credit to reduce taxes for moderate- to low-income earners and the premium tax credit associated with the Affordable Care Act. TurboTax can help determine if you qualify for these credits and deductions.

Know The Key Dates For Health Care Reform

"Open enrollment periods for the health insurance marketplace under the Affordable Care Act are limited" says Mac Schneider, a retired certified public accountant from Albion, Michigan. ?Avoiding tax penalties requires awareness of important dates that may vary year-to-year.? As well as key dates, there are time cycles and coverage gap allowances important to health insurance coverage under provisions of health care reform.

Add a Comment

*0 / 3000 Character Maximum