Do You Have to Report Non-Taxable Income?

The Internal Revenue Service (IRS) considers any income you receive as taxable unless a specific law exempts it. Non-taxable income is money or benefits received that are not subject to federal income tax. However, the term “non-taxable” does not mean the income can be disregarded. Certain types of non-taxable income must be reported on your tax return because this information can influence other calculations, making it a necessary step for accurate filing.

Identifying Common Non-Taxable Income

Many income sources are not subject to federal income tax. For the recipient, the value of property or money received as a gift or from a deceased person’s estate is not considered taxable income at the federal level.

Child support payments are not classified as income for the custodial parent receiving them. Similarly, proceeds from a life insurance policy paid to a beneficiary due to the insured person’s death are not taxable.

Government-provided assistance benefits are often non-taxable, including most welfare benefits and payments from programs like the Supplemental Nutrition Assistance Program (SNAP). Workers’ compensation benefits received for an on-the-job injury or illness are also exempt from federal tax.

Qualified scholarship funds used for tuition, fees, and required course materials are not taxable. However, if scholarship money is used for other expenses like room and board, that portion may become taxable. Many veterans’ benefits administered by the Department of Veterans Affairs are also exempt from federal tax, including disability compensation and education benefits.

Reporting Requirements for Specific Non-Taxable Items

Certain types of non-taxable income must still be reported on your federal tax return. A primary example is tax-exempt interest earned from municipal bonds. This interest is not subject to federal income tax, but it must be reported on Form 1040.

The taxability of Social Security benefits depends on a taxpayer’s “provisional income.” To determine this, you add your modified adjusted gross income (MAGI), one-half of your Social Security benefits, and all of your tax-exempt interest. If this total exceeds certain thresholds ($25,000 for single filers or $32,000 for those married filing jointly), a portion of the benefits becomes taxable.

Receiving a refund for state or local taxes you paid in a prior year may have reporting implications under the “tax benefit rule.” If you claimed the standard deduction in the year you paid the taxes, the refund is not taxable and does not need to be reported. If you itemized your deductions, the refund is reportable and may be taxable to the extent the original deduction provided a tax benefit.

Individuals who work abroad may be able to exclude a portion of their earnings from U.S. tax through the Foreign Earned Income Exclusion. For the 2025 tax year, the maximum exclusion is $130,000. To claim this exclusion, a taxpayer must file Form 2555, Foreign Earned Income, with their tax return.

The Impact of Reported Non-Taxable Income

Reporting certain non-taxable income has direct financial consequences because the information is used to calculate a taxpayer’s Modified Adjusted Gross Income (MAGI). MAGI determines eligibility for a wide range of tax deductions and credits. It starts with your Adjusted Gross Income (AGI) and adds back certain deductions and non-taxable income, such as tax-exempt interest.

The MAGI figure serves as an income threshold for many popular tax benefits. For instance, eligibility for the Premium Tax Credit, which helps lower the cost of health insurance purchased through the Health Insurance Marketplace, is based on MAGI. The ability to deduct contributions to a traditional IRA or to contribute to a Roth IRA is also phased out at certain MAGI levels.

For 2025, the income phase-out range for Roth IRA contributions is between $150,000 and $165,000 for single filers and between $236,000 and $251,000 for joint filers. For those covered by a workplace retirement plan, the deduction for traditional IRA contributions is phased out for single filers with income between $77,000 and $87,000 and for joint filers with income between $126,000 and $146,000.

The student loan interest deduction is another benefit tied to MAGI, but this deduction is phased out as MAGI increases. For 2025, this phase-out occurs for single filers with a MAGI between $85,000 and $100,000 and for joint filers with a MAGI between $170,000 and $200,000. By including specific non-taxable items in the MAGI calculation, the tax system provides a more accurate measure of a person’s ability to pay.