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What income is not taxable in Wisconsin?

Published in Wisconsin Tax Exemptions 4 mins read

In Wisconsin, several types of income are not subject to state income tax, providing significant relief for many residents. Key among these are Social Security benefits, which are entirely exempt from state income tax.

Key Non-Taxable Income Sources in Wisconsin

Understanding what income is not taxable can help individuals better manage their finances and accurately file their tax returns. Wisconsin law provides specific exemptions for various income types.

Social Security Benefits

Since tax year 2008, all Social Security benefits have been fully exempt from Wisconsin state income tax. This means that unlike some federal taxation rules, Wisconsin does not tax any portion of your Social Security payments, regardless of your overall income level. This full exemption applies to all recipients of Social Security, marking a significant change from prior tax years when up to 50% of benefits could be taxed for higher-income individuals.

Other Common Exemptions

Beyond Social Security, Wisconsin exempts a range of other income types. These exemptions often align with federal guidelines but are specifically enacted under state law.

  • Child Support Payments: Payments received for child support are generally not considered taxable income to the recipient.
  • Welfare Benefits: Most payments received from public welfare programs, such as Temporary Assistance for Needy Families (TANF) or Wisconsin Works (W-2), are not taxable.
  • Gifts and Inheritances: While significant gifts or inheritances might be subject to federal gift or estate taxes (though very high thresholds apply, and Wisconsin does not have an inheritance tax), they are generally not considered taxable income to the recipient for state income tax purposes.
  • Life Insurance Proceeds: The proceeds received by a beneficiary from a life insurance policy upon the death of the insured are typically excluded from taxable income.
  • Workers' Compensation: Payments received for workers' compensation for an occupational sickness or injury are not taxable.
  • Certain Disability Payments: Depending on the nature and source, some disability payments may be exempt. For example, some payments from accident and health insurance policies are non-taxable if you paid the premiums.
  • Qualified Foster Care Payments: Payments received for providing foster care are generally not taxable.
  • Scholarship and Fellowship Grants: Amounts received as a scholarship or fellowship grant are tax-free if used for qualified education expenses (tuition, fees, books, supplies, and equipment required for courses) and if you are a candidate for a degree at an eligible educational institution.
  • Reimbursements for Business Expenses: If you are reimbursed by your employer for business expenses, and these reimbursements are accounted for under an "accountable plan," they are typically not considered taxable income.

Understanding Exemptions and Their Importance

Navigating tax laws can be complex, but understanding non-taxable income is crucial for accurate tax planning and compliance. These exemptions reduce your adjusted gross income (AGI) for state tax purposes, potentially lowering your overall tax liability.

Practical Insights:

  • Record Keeping: Even for non-taxable income, it's wise to keep records of all income received. This can be helpful if you ever need to demonstrate the source of funds or clarify your tax situation.
  • Specific Rules: Always remember that specific rules and qualifications apply to each type of exemption. For instance, while most scholarships are tax-free, any portion used for non-qualified expenses (like room and board) could be taxable.
  • Consult Resources: For detailed and up-to-date information, it's always recommended to consult official resources from the Wisconsin Department of Revenue (DOR) or a qualified tax professional.

Summary of Common Non-Taxable Income in Wisconsin

Below is a summary of some of the most common types of income generally not subject to Wisconsin state income tax:

Type of Income Description
Social Security Benefits Fully exempt from Wisconsin state income tax since tax year 2008.
Child Support Payments Payments received by the recipient are generally not taxable.
Welfare Benefits Most payments from public welfare programs (e.g., TANF, W-2).
Gifts & Inheritances Generally not considered taxable income to the recipient (though other taxes may apply in some cases).
Life Insurance Proceeds Benefits paid to a beneficiary upon the death of the insured.
Workers' Compensation Payments for occupational sickness or injury.
Qualified Scholarship/Grants Used for qualified education expenses, from an eligible institution.
Certain Disability Payments Depending on source and premium payer (e.g., if premiums were paid with after-tax dollars).
Qualified Foster Care Payments Payments received for providing foster care services.
Business Expense Reimbursements Under an accountable plan where expenses are substantiated.