What Are Examples of Non-Taxable Income?

While the Internal Revenue Service (IRS) considers most money and benefits received as taxable income, numerous exceptions exist. Non-taxable income is any form of compensation, benefit, or value received that federal law explicitly exempts from income tax. Understanding these exemptions is part of accurate tax preparation, ensuring that individuals do not overstate their income and overpay their taxes. The IRS provides detailed guidance, often in publications like Publication 525, “Taxable and Nontaxable Income.”

Gifts, Inheritances, and Life Insurance

Large, one-time receipts of money or property from gifts, inheritances, and life insurance policies are not considered taxable income to the person receiving them. When an individual receives a gift of cash or property, its value is not included in their gross income. The tax obligation, if any, falls upon the giver through the federal gift tax. This tax is triggered only when gifts from one person to another exceed the annual exclusion of $19,000 for 2025. If a gift exceeds this threshold, the giver must file Form 709, but tax is often not paid until their lifetime gift exemption ($13.99 million in 2025) is exhausted.

Money or property received from a deceased person’s estate is not subject to federal income tax for the beneficiary. The responsibility for any estate tax owed rests with the decedent’s estate before assets are distributed. It is important to distinguish the inherited asset from any income it may generate after being received. For instance, if you inherit a stock portfolio, the value of the stocks at inheritance is tax-free, but any subsequent dividends are taxable income.

Proceeds from a life insurance policy paid to a beneficiary upon the death of the insured are free of federal income tax. A distinction arises if the insurance company holds the proceeds for the beneficiary, earning interest. In such cases, while the principal death benefit remains tax-free, the interest income earned is taxable to the beneficiary.

Support and Compensation Payments

Certain payments received for personal support or as compensation for specific hardships are exempt from federal income tax.

• Child support payments are neither taxable to the recipient parent nor tax-deductible for the parent who pays them. This ensures the funds are fully available for the child’s care.
• Benefits provided under a workers’ compensation act for an occupational injury or illness are fully non-taxable. This applies to payments that compensate for the injury and replace lost wages.
• Compensatory damages received for physical injury or physical sickness are not considered taxable income. This includes payments for medical bills and pain and suffering. In contrast, punitive damages are almost always taxable, as are payments for emotional distress not originating from a physical injury.
• The tax treatment of disability benefits depends on who paid the insurance premiums. If you paid for a policy with after-tax dollars, the benefits are tax-free. If your employer paid the premiums and you did not include them in your income, the benefits are taxable.
• Various forms of public assistance are not subject to income tax. This includes welfare payments and benefits from the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps.

Education and Employee Benefits

Several benefits related to education and employment are structured to be non-taxable under specific conditions.

• For degree candidates, qualified scholarships and fellowship grants are tax-free. To qualify, the funds must be used for tuition, mandatory fees, and course-related materials. If any portion is used for non-qualified expenses, such as room and board, that amount becomes taxable income.
• Employer contributions to qualified health insurance plans are a common non-taxable benefit. Similarly, employer contributions to an employee’s Health Savings Account (HSA) are not included in income.
• An employer can provide up to $50,000 of group-term life insurance coverage to an employee tax-free. The value of any coverage exceeding this $50,000 limit must be included in the employee’s taxable income.
• The IRS permits “de minimis” benefits, which are items of such small value that accounting for them is impractical. Examples include occasional personal use of a company copy machine, office snacks, or company-provided meals.

Investment and Property Sale Exclusions

A taxpayer can exclude up to $250,000 of capital gain from the sale of a main home. For married couples filing a joint return, this exclusion doubles to $500,000. To be eligible, the taxpayer must meet both an ownership test and a use test, requiring them to have owned and lived in the property as a primary residence for at least two of the five years preceding the sale.

Interest earned on bonds issued by state, city, or county governments, called municipal bonds, is not subject to federal income tax. This tax advantage makes them an attractive option for investors. While this interest is federally tax-exempt, it may still be subject to state or local income taxes.

Distributions from Roth retirement accounts, such as a Roth IRA or Roth 401(k), are a form of non-taxable income. Because contributions are made with after-tax dollars, qualified distributions are tax-free. A distribution is qualified if the account has been open for at least five years and the account holder is at least 59½ years old, is disabled, or is using the funds (up to a $10,000 lifetime limit) for a first-time home purchase.