Exclusions from Income

Generally, all income is subject to federal tax. However, the Internal Revenue Code (IRC) does not specifically define income. Gross income is generally considered to include all income from whatever source derived. There are a number of exceptions to, or items that are excluded from, gross income under the IRC. This article highlights a few of these exclusions. If a certain amount is excluded from income, an individual is not taxed on it.

Certain Prizes and Awards — Generally, all amounts of money an individual receives in the form of prizes or awards are included in his or her gross income under section 74 of the IRC. Thus, if you win the lottery, you will be taxed on the amount you win. There are three exceptions to this general rule. The following prizes and awards are excluded from gross income:

  • Amounts excluded from income under section 117 of the IRC as scholarships or fellowship grants
  • Awards to employees for length of service or safety achievements
  • Prizes and awards for charitable, scientific, artistic or similar achievements if the winner assigns the prize or award to a charitable or religious organization

Casualty Insurance Proceeds for Increased Living Expenses — Under IRC section 123, any money that a taxpayer receives under an insurance policy as compensation for increased living expenses due to the loss of use or occupancy of his or her residence is not included in gross income. This exclusion applies if the taxpayer’s principle residence is destroyed or damaged by a storm or other casualty. Thus, if your home is damaged or destroyed by a hurricane and you receive insurance money to reimburse you for increased living expenses, the amount of the reimbursement is excluded from your gross income.

Disaster Relief Payments — IRC section 139 provides that qualified disaster relief payments are not included in gross income. Under this section, a qualified disaster relief payment is defined as any amount paid to or for the benefit of an individual

  1. to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
  2. to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,
  3. by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
  4. if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

26 U.S.C. §139(b).

Foster Care Payments — IRC section 131 provides that amounts of qualified foster care payments that a taxpayer receives from a foster care provider are not included in gross income. A qualified foster care payment is defined in section 131 as any payment made by a state, political subdivision or qualified foster care placement agency that is either paid to a foster care provider for caring for a qualified foster care individual in the foster care provider’s home or is a difficulty of care payment.

Meals and Lodgings Furnished to Employees — Under section 119 of the IRC, the value of meals furnished to employees by the employer are not included in gross income if the meals are furnished for the benefit of the employer and are furnished on the employer’s premises. The value of lodging furnished to an employee is excluded from gross income if the lodging is furnished for the convenience of the employer, it is furnished on the employer’s premises and the employee must accept the lodging as a condition of employment.

Preparing for a Meeting with Your Tax Attorney

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Preparing for a Meeting with your Tax Attorney

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