Sometimes it's frustrating watching a financial management show since the host and/or guests often assume the topics being covered are familiar to viewers. Please write a column on sources of income that are not taxed or are taxed at a very favorable rate. 

— J.G., e-mail

Your request causes the following question to surface: Is this income tax provision a loophole or legislative help?

We won't take a stance on the below income elements, which usually are put into one category or another.

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It reminds us of the story told about the atheist on his deathbed. The non-believer asks for a Bible. A chaplain enters the hospital room and asks, "Are you considering asking God for forgiveness since you have denied the Creator's existence your entire life?" The atheist responds, "NO! My primary reason for reading the Bible is I am looking for loopholes." The chaplain responds, "Let me recommend you change your stance and seek the Lord's help."

There are many types of income that are not taxed. Interest on state and local bonds (a.k.a. municipal interest) is reported but is not included in taxable income. Stock dividends that come in the form of additional shares of stock are neither reported nor taxed until shares of stock are sold. Workers' compensation payments do not appear on an income tax return.

Numerous fringe benefits are not reported, including non-discriminatory health and medical insurance premiums paid by one's employer, group-term life insurance premiums where the policy coverage is $50,000 or less and so-called working condition benefits (e.g., business use of a company vehicle, employer-provided cell phone, education assistance needed to maintain or improve job skills or required by law for a person to keep his or her job status). Other non-taxable fringe benefits include use of athletic facilities, employee discounts on company products, employee achievement awards and those considered de minimis or minor (e.g., company parties, supper money, occasional tickets to theatrical or sporting events, as well as flowers, fruit and books given in special circumstances).

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Payments that encounter specific limits in order to be tax-free include child or dependent care plans, which must be under $5,000; employer education plans where a $5,250 exclusion comes into play and the courses do not have to be job-related; transportation benefits such as mileage reimbursements that do not exceed the IRS allowable amount and parking and transit passes, which are tax-free up to $280/month; adoption benefits avoid taxation if they are at or below $14,490.

A lower (or favorable) rate of taxation on certain types of investment income is granted by the Internal Revenue Code. Qualified cash dividends, which are paid by most domestic corporations and some foreign entities, are taxed at rates of either zero, 15% or 20% depending on the taxpayer's taxable income. Long-term capital gains also benefit from these favorable rates. For both qualified cash dividends and long-term capital gains, the lower rate trifecta is applied using the "Qualified Dividends and Capital Gain Worksheet" found in the Form 1040 instructions. This loophole or legislative help is tied to the following rationale — an investor is taking a risk when acquiring stock. To recognize such risk-taking, the rates of taxation are lowered. IRS Publication 525, Taxable and Nontaxable Income provides additional helpful information about the above items plus a potpourri of others such as disability benefits and damage claims.

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Ken & Klee's Tax Notebook — Don't forget there are typically no income taxes withheld on cash dividends and capital gains. That means estimated tax payments usually must be made to the IRS and possibly your state. For a more complete fringe benefits listing, see IRS Publication 5137, Fringe Benefit Guide.

An automatic six-month filing extension is allowed by filing a Form 4868. This does NOT extend payment of taxes owed. Our April 16 column will feature an extensive look at the benefits of asking for more time to prepare your 2022 filing.

According to a CNN report last week, the IRS has issued 54 million refunds, which tally to an average of $2,933, down from $3,305 at the same point in 2022. This likely relates, at least in part, to a number of income tax provisions mentioned in previous columns that were reduced or eliminated as the COVID threat became less alarming.

Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at rklee@nd.edu.

Ken Milani is a professor of accountancy at Notre Dame where he served as the faculty coordinator of the Notre Dame Tax Assistance Program. Contact him at milani.1@nd.edu.

E-mail questions to either.

This article originally appeared on South Bend Tribune: Tax Talk: Non-taxed income or income taxed at favorable rate