What are 12 sources of non-taxable income?

Ralph
00:00:00

Are you tired of watching your hard earned money disappear into Uncle Sam's pocket? What if I told you there are perfectly legal ways to keep more of your money without paying taxes on it?

Well, today you're about to discover 12 sources of income that the IRS can't touch. That's right, they don't tax it.

Today's question comes from Violet, who asked this question, what are the different types of non taxable income I should know about? Going to answer that question today, Violet.

Podcast Announcer
00:00:28

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth, to break the bondage of financial despair.

Get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep.

Ralph
00:01:04

Well, thank you for joining me today.

I'm excited to share some powerful insights with you that could really help you keep more of your hard earned money. And that's what we're all looking to do. How can we keep more of our hard earned money?

Now, if you missed yesterday's show, we celebrated the new year with a way to get you on the best financial path for 2025. I covered some essential strategies that will help you set up your financial success in 2025.

So if you miss it, I'm going to encourage you to go back and check it out. And as always, you can find all of our episodes. It's really easy to find askralph.com. Well, let me share today's listener question.

As I mentioned a few moments ago comes from Violet. This is what Violet wrote. She said, dear Ralph, I recently started a new job and I'm trying to be smarter about my finances.

Every time I look at my paycheck, I'm shocked by how much goes to taxes. I've heard there are some types of income that aren't taxable, but I'm confused about what qualifies.

Can you help me understand what income sources I don't have to pay taxes on? I want to make sure I'm making the best financial decisions for my family's future. Well, Violet, that is a great question.

And yes, you're right, taxes can be very confusing. That's what keeps me in a career and keeps my business going. And you're right, it's all about making great decisions.

So I'm going to help you today discern what's taxable, what's not taxable. Also, you can make those better decisions. And remember this, Violet, just like your question does today, your questions drive the show.

So if you've got burning financial questions, head over to justaskralph.com and submit that question there and you'll have your show answered on the show. Violet, your question reminds me of how God calls us to be good stewards of our resources.

And it brings to mind this powerful verse from First Timothy.

It comes to us from First Timothy, chapter 6, verses 17 and 18 and tells us this Command those who are rich in this present world not to be arrogant, nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. Command them to do good, to be rich in good deeds, and to be generous and willing to share.

Well, I don't know about you, Violet, but I think that verse kind of says it all. If you think about it, what it's really saying is strive not to put your hope in wealth, but rather put your hope in God.

And that's a great way to frame today's discussion. So let's get right to it. Well, let me start today with a deeply personal story and it truly changed the way I feel about non taxable income forever.

I think it was back in 2019. I had this guy I met, his name was Michael. Now he was a construction foreman. Picture this guy, big, burly guy, father of three children.

And he was the consummate family provider. I mean, this dude works 60 hours a week because his goal was to give his kids the life that he never had. His family struggled when he was younger.

I remember him telling me one time about the struggles he went through. He kept those Wonder Bread bags because they used them for galoshes in the winter in the snow time.

And he didn't want his kids to have to live like that. So he put it all on the table. He worked hard, 60 hours a week. And then all of a sudden, this happened. One rainy Tuesday morning.

Here he is, a construction foreman, big fella out there supervising a project, and he slipped from the scaffolding and he suffered a devastating spinal injury. It was terrible. It was a terrible situation. Worse than all of that. All of a sudden now his family faced financial catastrophe.

Because think about it, he was the primary breadwinner of the house. His wife was a stay at home mom taking care of his kids.

And all of a sudden he was facing the very real possibility of that the primary income that he was bringing in would be lost. And think about the mounting medical bills. I mean, here is a guy with a devastating spinal injury.

There was even talk at one point of whether he would be able to work or not. So right away his wife went out and got a job. Fact, she got several jobs, but even with those things, their savings were rapidly depleting.

And then all of a sudden he came in to meet with me. We were doing their tax, they've been tax clients for years.

And he had starting to get some mobility back and, and we sat down together and I said, Michael, what's going on? He says, ralph, he says, you're never going to believe this.

He said, but I made a decision a few years back to buy something that they call supplemental disability insurance. And he said at the time, the HR people said that go ahead and do this.

But he, they said to him, look, and this is kind of a funny tax little nuanced thing. The, the HR people actually said to him, here's what we want you to do. Don't pay for this with pre tax dollars.

We want you to pay for this with after tax dollars. And he said to me, he said, Ralph, at the time, he said they were small at the time, it's not a whole lot of money.

But that decision those many years back, because he decided to not only pay for that disability insurance, but to pay for it with after tax dollars resulted in him getting tax free disability payments.

And yes, you heard me right, that amount of despair when he had that injury, that crippling injury, had to lose medical expenses, his salary was cut substantially and even with his disability payments, he was only getting 2/3 of his pay. But here's the beautiful difference. That 2/3 was completely tax free, which made up for the difference of what he would have been paying in tax.

Let me give you a quick example. So because these disability payments were tax free, he wasn't having to pay tax on them.

So even though it was only 2/3 of what he was usually making, he wasn't paying Social Security tax, he wasn't paying Medicare tax, he wasn't paying federal tax, he wasn't paying state tax. So he was basically getting his net paycheck instead of that gross paycheck where he had to pay taxes. And it became his family's financial lifeline.

It took the stress off of the situation that seemed really bad at the time. The other thing he was able to do is he's able to use his health savings account again. That's one of the things.

He had listened to me before as a tax client and he set up this health savings account.

And then what he was able to do is he was able to pay for a lot of those medical expenses the CO pays and the supplemental things that weren't covered by insurance. He was able to pay for those with that money he had set aside in that health savings account so he didn't have to deplete his regular savings.

And then he also had tax free employer provided insurance benefits because of the fact he was hurt on the job. There was things that were covered by that. So overall, Michael had created this comprehensive tax advantage strategy.

And to be honest with you, he never even realized that when he was doing it. It was the biggest surprise in the world when he found out that the decisions he had made put him in this fantastic tax advantage position.

So you may be asking Ralph, what was the outcome? What is a very simple outcome? His family achieved financial stability.

They were able to focus on his recovery and not be burdened with that financial stress.

Listen, almost every day I hear another story about somebody who was hurt, somebody was hurt at work or hurt in a car accident and it destroys them financially. And what does that do? That leads to relationship destruction.

I don't know how many clients I've worked with over the past 30 years who financially got themselves in trouble, maybe because of nothing they did. But then it destroyed a marriage, it destroyed relationships.

So that was one of the things that was so great about this particular thing, is because he had set up this tax advantage plan from the front end, the focus shifted completely from financial stress to recovery. And at the same time is amazing if you think about it. He had built an emergency fund.

And because he had that emergency fund, he was able to continue to build on that emergency fund and he built on that. HSA started doing more things in today so they would be tax advantaged. So what is the key takeaway? What is it I want you to know today, Violet?

This is the bottom line. I want you to understand non taxable income sources because they're crucial for financial security.

It's those small financial decisions that can have a major impact on the teacher. Think about that.

Michael made that small decision to pay for that small little disability policy and he took the advice of the HR people and paid for it with after tax money. See, here's the deal. I didn't talk about this at the beginning.

Had he paid for that with pre tax money, then all of those benefits would have been taxable. So he would have still gotten 67% of his income. But guess what? Then he would have still had to have paid tax on that.

So was that proactive financial planning that really paid off for Michael? So now at this point you might be saying, ralph, that's great, but how does that impact me?

So I'm going to give you 12 powerful sources of non taxable income that you need to know about. These are things that if we're going to educate ourselves as we enter into 2025, let's grow our understanding of what is non taxable.

And the first one is the one we already talked about, that's that disability insurance payments. Just like Michael, if you pay these premiums with after tax dollars, generally the benefits are tax free. Like I said, that's just like Michael.

He paid for them with after tax money because he listened to the folks in hr.

And then when the terrible happened, he was in that critical injury, he was able to get those benefits tax free, which really made up the difference because like I said before, had he gotten two thirds of his income and still had to pay tax on it, he would have been in a lot worse shape. So that's the first thing, disability insurance payments.

Another thing that surprises people, and that's number two here are employer provided insurance policies. Your employer's health insurance is not taxable as income to you. And here's another thing a lot of people don't know.

You can also have $50,000 in life insurance coverage tax free.

Now, if they go over and above that $50,000 policy, when you get your W2 at the end of the year, you're going to see they've added in the additional cost of that life insurance because you have to pay tax on that. But like I said, your employer's health insurance, that's piece number A and piece number B is that life insurance.

So if your employer is offering you life insurance, they can give that to you absolutely tax free up to $50,000. And they don't tax your health insurance at all. So those are those employer provided insurances. A lot of people don't know about those.

Number three, health Savings accounts, hsa. I talk about these on the show several times and these are fantastic. It's what I call the triple tax advantage.

And that's because the contributions are tax deductible, the earnings are tax free and the withdrawals are completely tax free. And I've done shows on that in the past I encourage you to check those out. But that's why I say that's got that triple tax advantage.

If you don't have an HSA and you have extra money, you've already met the other things you need to do. Listen, go get a health savings account. It is a lifesaver.

And Michael found it be a lifesaver when he needed to pay for all these medical expenses that he wasn't expecting. So that's health savings accounts. Let's look at number four. And this is has nothing to do with your employment.

And a lot of people are surprised by this. But life insurance payouts are generally tax free.

So if someone names you as a beneficiary on their life insurance policy, if you have a spouse or maybe your mother or father names you as a beneficiary, generally those death benefits are completely tax free. So it's a great tax planning idea. A lot of people come in to see me and they'll say, ralph, hey, I want to know how my taxes are going to look.

I just found out that I'm going to be the beneficiary of my uncle Sal's life insurance policy. I wasn't very close to him, but it was a bonus to me. I found out he left me $10,000.

And they'll say to me, okay, well Ralph, how much do I have to set aside for taxes for that? And I'll say to them, well, tell me what it is.

And when I find out that it's actually just life insurance payments, there's no tax at all, they're like, wow, you serious? I'm like, yeah, that's the truth. So that's that life insurance path, that's number four. Number five.

And this one, a lot of times your broker will talk about this and that's municipal bond interest.

So if you've got bonds, and I'm going to get in a little in a little bit in the weeds here, but if you've got municipal bonds, these are bonds issued by local and state municipalities.

The interest earned on these bonds is typically free from federal taxes and depending upon your state, sometimes state taxes, depending upon where the bond was issued. So if you're looking for an investment, you talk to your broker about this.

But if you're looking for an investment that will give you tax free earnings, both at the federal level and some states, municipal bond interest is a big one of those. And you'll hear them called munies, that's another term for it. So that's number five. Number six is the sale of your primary residence.

And it's amazing to me how many people don't know this. You can exclude up to $250,000 in capital gains when selling your primary home.

Now, if you're married, it doubles and it's 500,000, which surprises a lot of people as well. A lot of people come in, they say they'll come in and meet with me. I'll say, hey, Ralph, this year we're thinking about selling our house.

How's that going to impact our taxes?

And if I know a little bit about their situation, I'll look at the value of their house and I'll say to them, well, okay, when did you buy this house? Well, we bought the house 10 years ago. All right, what did you pay for the house? Well, at the time we bought it, it was $200,000. Okay.

And then I'll say to them, well, how much have you put into the house as far as improvements and all those sort of things?

And just a little teaser, I'm going to be doing a show in the next couple days about how those home improvements might not be the best thing for you to do for house value. But just a little teaser out there. So continue with my story. So they'll say to me, well, Ralph, we paid 200,000 for the house about 10 years ago.

Yeah. And then we put in a driveway. We added a bonus room. So I guess we added about 50,000 to it.

So what, what I would call is their adjusted basis is now $250,000. And the next thing I'll say to them, I'll say, okay, well, what do you think you're going to sell the house for?

Well, Ralph, you're going to love this one.

The property values in our area have short, so we think we can get about $450,000 for our house, but we're concerned we might have to pay a capital gains tax because we're making money on this. And they love the answer I come up with next.

Well, actually, you're not going to pay any tax at all because if you sell it for 450,000, let's just assume that's the gross proceeds after you pay the realtor commission and transfer taxes. Well, if you pay, if you receive 450 your balance or your adjusted basis with 250, you've got a $200,000 capital gain.

And you would think, okay, well, then I got to pay tax on $200,000. Well, here's the best part. You don't, because if it's your primary residence, And I'm not going to get into the details of that today.

You can exclude up to $250,000 after you married, like I said, 500,000. So generally the sale of your primary residence for most people, unless you've had a huge amount of increase in value, is going to be tax free.

So that's number six, that sale of the primary residence. Let's look at number seven. That's financial gifts. These are the gifts you receive from family or friends and all those sort of things.

And they're not considered taxable income either. Now there are some rules about the amount of money somebody can give you in a, in a particular calendar year.

But generally financial gifts are not taxable.

So if your grandparents decide, hey, you know what, we're going to help you buy that first home of yours and they give you $10,000 or something along those lines, generally they're not taxable. So that's another great area for non taxable income. Let's move on to number eight, and that's inheritances.

And I talked a little bit about this when I talked about life insurance. But this again surprises people. If you inherit from somebody. Now, generally they're not taxable.

And I'm going to say generally, because it depends what it is, if you inherit somebody's retirement plan or IRA or an annuity, there could be some tax on that because that is a pre tax money. But generally cash, property, investments, all those type of things that are received as an inheritance are generally tax free.

So if you see somebody in your family passing away and they're leaving you their home, they're leaving you cash, they're leaving you property, maybe an investment portfolio, and generally speaking, those things are not going to be taxable. Let's move on to number nine, and that's child support. And this is one that trips up a lot of people as well.

Generally if you're the receiver of child support, that's tax free as well. Because as long as, say it this way, as long as that money goes towards supporting the child.

But generally they're not taxable and unfortunately they're not tax deductible for the person paying it either. But child support generally is tax free.

Another one along these same lines, welfare payments, any type of government assistance programs provided are tax free as well. Another one, a lot of people don't think about qualified scholarships.

If you receive a scholarship, so long as you're using it for tuition and fees, that scholarship money is tax free. And the last one, now this one's going to cause A little controversy. Social Security benefits.

Now, if you listen to Donald Trump, there's a talk about he's going to eliminate taxation on Social Security. Well, it's kind of already there. Now let me explain. Social Security is partially taxable at the federal level.

And what I mean by that, it depends on your other income. And I'm not going to get into the details here. Unless you have income from other sources. And to be honest with you, you better have it.

If you're going into retirement only having Social Security benefits to live on, you're going to be in trouble. But one of the beautiful things and the reason I put on this list is most states don't tax Social Security income at all.

I've been here in Delaware and Delaware doesn't tax Social Security at all.

And like I said, watch the news because President Trump, who's going to get sworn in here in just a couple weeks, has said to seniors that he's going to try to eliminate the tax on Social Security benefits. And I'm one of these people that honestly agrees. I think that's a great idea because it floors me. If you think about this for a second.

I'm going to go on a little bit of a Ralph tangent. Social Security benefits being taxable is double taxation if you think about it.

So you earn those dollars when you were working, you paid Social Security tax to put aside for yourself and then you come along, you retire and enter taxing those benefits you already paid taxes on the first time. So listen, call your senator, call your representative and say, look, get this Social Security tax off of our backs.

It would be a great boon to our economy. So Those are the 12 things. Let me reiterate those one more time. These are the 12 powerful sources of non taxable income that you need to know about.

We talked about disability insurance payments. We talked about employer provided insurance. We had a discussion about those HSAs.

Again, I encourage you to learn about those that triple tax advantage. We mentioned that life insurance payouts generally are tax free. We talked about, maybe you'll talk to your broker about the municipal bond interest.

I share with you the, the whole way that sale of primary residence works. We talked about financial gifts, we talked about inheritance and I'm sorry, get a little sinus thing going on here.

So if I sound a little nasally, I apologize. So we talked about financial gifts, we talked about inheritances.

We talked about child support, we talked about welfare payments, qualified scholarships, and then we ended it with that Social Security benefits discussion. Now I'm going to share some action steps that you can take right away in a few moments to think about how you can put some of these things to work.

But first, let me ask you this. Are you one of those folks, like a lot of us, that are struggling to balance your money and your faith? Listen, I get it.

Sometimes it feels like you're the only one trying to make godly wise financial decisions in a world that pulls you in a hundred different directions. And that's exactly why I go live every Tuesday night at 7:00pm, at 7:00pm Eastern Time, because I want you to know you're not alone in the journey.

You know what makes my heart sing when I see members of our community that's at Live Community having those aha moments.

I see it sometimes in the chat during our live shows when someone finally breaks free from debt or they make a comment about how they finally understand how to honor God with their investments. Or maybe they find that peace of mind in their financial decisions because those are the moments that matter.

And every week I hear stories that could be your story. Like this one, Somebody said, ralph, I was drowned in debt until I found your show.

Or this one, I never thought I could invest and stay true to my faith. And this one, which just impacted me significantly, somebody wrote, your advice helped save my marriage from financial stress.

Man, you don't realize how much financial stress destroys relationships. I did a show about that a couple weeks ago and here's what makes our Tuesday night special. I have real talk about money and faith.

There's no sugarcoating. If you know me, I don't sugarcoat to begin with. But Tuesday night's even sharper than that. And I answer your questions live.

Yes, I'm going to help you with your specific situation. You type right into the chat. You can send me a question ahead of time and say, ralph, I want to talk to you about this on the live show.

And there's a supportive family of believers who are in that chat who get what you're going through because guess what? They're going through the same things. And they'll give you ideas, they'll help give you hope, to help give you support.

And I also give away a hundred dollars Amazon gift card every single week. You want to know the best part? The real magic happens in our community when you join us.

You'll see others facing, like I said a few minutes ago, the exact same challenges you're facing. But the difference is they're winning and not winning. Their victories become your inspiration. So you might be saying, Ralph, that sounds fantastic.

What do I need to do? Well, here's what I want you to do right now.

Take out your phone and add askralphpodcast.com/live to your calendar for Tuesday at 7pm Eastern Standard Time. You don't have to worry about a new link every week. You go right to that link.

That's askralphpodcast.com/live every Tuesday night, 7:00pm Eastern Standard Time. And do me a favor, make this commitment to yourself and your financial future. Don't let another week go by feeling stuck or alone. Join our community.

And every Tuesday night, let's work on building a strong financial future while keeping your faith at the center. Now I'm going to be looking for you in a chat. And hey, you might just walk away with that hundred dollar Amazon gift card.

So see you Tuesday at 7pm Eastern Time. Again, that's askralphpodcast.com/live. Now I promise to give you some action steps Based on our 12 sources of non taxable income.

So let me get right to it. Number one thing, review your current income sources and identify any that might qualify as non taxable.

So look through those things, go over that list that I talked about and look and see what things are non taxable and maybe you want to increase those. Maybe you can do some things at work with your HR folks to increase those areas of non taxable income. As I said before.

Number two, consider opening an hsa, that health savings account if you've got those high deductible health plans. And unfortunately more and more people are suffering with those high deductible plans.

Number three, a little bit of a self pitch here, but consult with a tax professional to ensure you're maximizing your tax free opportunities.

One of the things I meet with when I talk to my clients, we have a discussion about what are areas where you can shelter income from taxes, whether it be your retirement plan where you put money in that HSA or you put money into deferred compensation, or you do those FSAs where you're putting money aside for flexible spending benefits.

And last but not least, talk to your broker and evaluate municipal bonds as part of your investment strategy if you're trying to get out of those federal taxes on those investments. Now tomorrow I'm going to be tacking another important topic. Kind of rides along that whole discussion we had about Social Security 10 today.

But I'm going to be talking about what to do to protect yourself if your Social Security number has already been compromised. I'm going to give you some action steps you can take.

If you just now realize that your Social Security's numbers on the dark web or you got some kind of notification from one of your creditors, I'm going to give you some concrete things you can do so you don't want to miss that crucial security topic tomorrow. Remember this My passion is to help you achieve financial success.

I want to see you live out your dreams and I want to see that growing your faith, working together. We can master your finances from that Christian perspective. So as I always end this show, I'm going to end it with this.

Stay financially savvy out there and God bless you abundantly.

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00:26:47

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