Non Taxable Income: A List of Common Examples

Non-taxable income is money or value received that is not subject to federal income tax. It does not need to be included in your gross income when you prepare your tax return. This income is different from tax-deferred income, like contributions to a traditional 401(k), which is taxed upon withdrawal, and is also distinct from tax deductions, which are expenses that lower your adjusted gross income. If income is not specifically exempted by law, the Internal Revenue Service (IRS) considers it taxable.

Common Sources of Non-Taxable Income

Gifts and Inheritances

Assets received as a gift or inheritance are not taxable income to the recipient. While the recipient has no tax liability, the person giving the gift may have tax obligations. If a person gives a gift exceeding the annual exclusion amount of $19,000 for the 2025 tax year, they must file a gift tax return using Form 709. This does not mean they will owe tax, as it first applies against a lifetime gift tax exemption of $13.99 million for 2025.

Life Insurance Proceeds

A payout from a life insurance policy received by a beneficiary due to the death of the insured is not taxable. The death benefit is not included in the beneficiary’s gross income, whether received as a lump sum or in installments. However, if the death benefit is left with the insurance company and earns interest, that interest income is taxable. Additionally, if a life insurance policy was transferred for valuable consideration, the tax-free exclusion may be limited.

Child Support Payments

Child support payments are not taxable to the parent who receives them, nor are they deductible by the parent who makes the payments. This rule applies regardless of the amount exchanged. For divorce or separation agreements executed after December 31, 2018, alimony is also not taxable to the recipient or deductible by the payer, aligning its tax treatment with child support.

Certain Scholarships and Fellowships

Scholarships and fellowship grants are tax-free if you are a degree candidate at an eligible educational institution and use the funds for qualified education expenses. These expenses include tuition and fees for enrollment, as well as books, supplies, and equipment required for your courses. Any portion of a scholarship used for non-qualified expenses, such as room and board or travel, is considered taxable income. Amounts received as payment for services like teaching or research are also taxable.

Workers’ Compensation

Benefits received under a workers’ compensation act for an occupational sickness or injury are not taxable. This applies to both periodic payments for lost wages and lump-sum settlements. An exception can occur if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). This interaction, known as a “workers’ compensation offset,” can reduce your Social Security benefits and result in a portion of your benefits becoming taxable.

Compensatory Damages for Physical Injury or Sickness

If you receive a settlement for a personal physical injury or sickness, the compensatory damages are non-taxable. Payments for medical bills, pain and suffering, and emotional distress resulting from the injury are not included in your income. However, punitive damages are almost always taxable. Any interest included in a settlement and compensation for lost wages are also considered taxable.

Employer-Provided Health Insurance and Certain Fringe Benefits

The value of an employer’s contributions to an employee’s health insurance plan is not taxable income. This applies to premiums paid by the employer and amounts paid by the employee on a pre-tax basis. This coverage cost is reported for informational purposes on Form W-2 in Box 12 with Code DD but does not add to taxable wages. Minor or “de minimis” fringe benefits are also non-taxable.

Tax-Exempt Interest and Investment Returns

Municipal Bond Interest

Interest income from municipal bonds is exempt from federal income tax. While federally tax-free, this interest may be subject to state and local taxes. If you purchase municipal bonds issued by your state of residence, the interest is often free from state and local taxes. However, investing in bonds from another state will likely mean you owe state and local income tax on that interest. Certain private activity bonds may also generate interest subject to the Alternative Minimum Tax (AMT).

Qualified Roth IRA Distributions

Distributions from a Roth IRA can be completely tax-free if they are “qualified.” Since contributions are made with after-tax dollars, investment earnings can be withdrawn tax-free in retirement, unlike traditional IRAs. For a distribution to be qualified, the account must have been open for at least five years, and the withdrawal must meet one of the following criteria:

• The account owner is at least 59½ years old.
• The owner is disabled.
• The distribution is made to a beneficiary after the owner’s death.
• The withdrawal is for a first-time home purchase (up to a $10,000 lifetime limit).

Reporting Requirements for Non-Taxable Items

Most non-taxable income does not need to be reported on your federal tax return, including the value of gifts, inheritances, or life insurance proceeds. However, some non-taxable items must be reported for informational purposes. The most common example is tax-exempt interest from municipal bonds. This amount, found in Box 8 of your Form 1099-INT, must be reported on Line 2a of Form 1040 but is not included in your taxable income.