Is it Worth Reporting Non-Taxable Income?

[Anna113]

Is there a tax benefit for reporting non-taxable income such as VA Disability payments or military dependent payments related to education? If so, where should it be reported? Is it true that reporting all income gives you a higher tax deduction because it increases your local sales tax paid? 

[DawnC]

You should not enter non-taxable income on your tax return.  It is true that you can get a higher sales tax deduction (if you itemize) by including non-taxable income in the calculation.   But TurboTax will specifically ask you to enter your non-taxable income in that section.  It will be used in the calculation for your sales tax deduction, but that income does NOT get reported anywhere on your tax return. 

Where do I enter my sales tax deduction?   If you use the Easy Guide (as opposed to entering all of your sales tax from receipts), you will get the screen below.   Answer YES and you will be prompted to enter the total of your non-taxable income which will increase your deduction (if not already maxed out, see below).  

NOTE:  For tax years 2018 through 2025, the SALT deduction (which includes sales tax) is capped at $10,000. That means if the combined total of your sales tax, real estate tax, and personal property tax amounts to $15,000, you can only deduct $10,000 maximum.