12 Types of Passive Income That Aren’t Taxable – Yahoo Finance
There are numerous ways to earn passive income, but unfortunately most of them are taxable. This is particularly true of income-generating investments, of which only a handful allow you to avoid paying tax.
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However, there are some credits, settlements and payouts that you can receive tax-free, although these are typically paid either annually or a single time. Here’s a look at some of the types of passive income that aren’t taxable.
Tax-Free Municipal Bonds
The easiest — and indeed, one of the only — ways to generate tax-free income from your investments is to buy municipal bonds. Generally, municipal bonds are tax-free at the federal level. Residents of the same state as the issuer typically enjoy a state-level tax break as well. However, capital gains, if applicable, are fully taxable.
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Inheritance
You won’t have to worry about paying federal tax on any inheritances you receive, no matter how large they may be. In some cases, the decedent may have to pay estate taxes, but that’s not a concern for beneficiaries. However, six states do impose inheritance tax on recipients, so you’ll have to verify whether all of your proceeds are completely tax-free.
Life Insurance Proceeds
If you are the named beneficiary of a life insurance policy, your proceeds will be paid to you free from income tax. This is true even if you receive a very large policy, such as $1 million or more. Note that if you cash in a life insurance policy, rather than receiving the proceeds of a death benefit, you’ll likely have to pay tax on some or all of it.
Disability Payments
In some cases, disability payments can be considered taxable income. However, if you pay for all premiums of a health or accident insurance plan, any disability payments you receive are not considered taxable income.
Gifts
Gifts can sometimes be taxable to the giver if they exceed the annual gift tax exclusion level, which is $17,000 per person for 2023. However, recipients of gifts never have to pay tax on what they receive.
Alimony
Alimony was formerly deductible by the payer and taxable to the payee, but that all changed in 2019. …….