What Income Does Not Need to Be Reported to the IRS?

Not all income needs to be reported to the IRS, which can simplify tax filing. While most money received is taxable, certain types of income are excluded under federal tax laws. Understanding these exclusions helps prevent unnecessary reporting and potential overpayment.

Common examples include gifts, inheritances, and specific investment earnings. Some educational benefits and employer-provided perks are also non-taxable. Knowing what doesn’t need to be reported ensures compliance with tax rules while reducing errors that could lead to audits or penalties.

Gifts

Money or property received as a gift is not taxable income, so recipients don’t need to report it. However, the giver may need to file a gift tax return if the amount exceeds the annual exclusion limit, which is $18,000 per recipient in 2024. This limit applies separately to each recipient, allowing multiple gifts without triggering tax obligations.

If a gift exceeds the annual exclusion, the giver must file IRS Form 709, but taxes are only due if total lifetime gifts surpass the $13.61 million exemption in 2024. Certain gifts are always exempt from gift tax, such as direct payments for tuition or medical expenses and gifts between U.S. citizen spouses.

Inheritances

Inherited money or property is not taxable income at the federal level, though income generated from inherited assets—such as rental income or interest—must be reported.

Inherited retirement accounts, like traditional IRAs and 401(k)s, are not taxed upon transfer, but withdrawals typically are. Under the SECURE Act, most non-spouse beneficiaries must withdraw the full balance within ten years, paying income tax on distributions. Some exceptions exist for certain eligible beneficiaries, such as minor children and surviving spouses.

State inheritance taxes may apply depending on the deceased person’s location. As of 2024, six states impose inheritance taxes, with rates varying based on the beneficiary’s relationship to the decedent. Estate taxes, which apply to an estate’s total value before distribution, are separate and only affect estates exceeding the federal $13.61 million exemption. Some states impose their own estate taxes with lower exemption limits.

Municipal Bond Interest

Interest from municipal bonds is generally tax-free at the federal level. These bonds, issued by state and local governments to fund public projects, offer investors periodic interest payments that don’t need to be reported as taxable income.

Some states also exempt municipal bond interest from state taxes if the bonds are issued within the investor’s home state. However, out-of-state municipal bond interest may be taxable at the state level.

Not all municipal bond interest is tax-free. Private activity bonds, which finance projects benefiting private entities, may be subject to the Alternative Minimum Tax (AMT), a system ensuring high-income earners pay a minimum tax. Investors subject to the AMT should consider whether private activity bonds align with their tax strategy.

Qualified Scholarships

Scholarships covering tuition, fees, and required educational expenses are not taxable if they meet IRS conditions. The recipient must be pursuing a degree, and funds must be used strictly for qualified expenses like tuition, books, and supplies. Any portion used for non-qualified expenses, such as room and board, is taxable.

Scholarships tied to work requirements, such as teaching or research, are generally taxable wages. However, exceptions exist, including scholarships under the National Health Service Corps Scholarship Program and Armed Forces Health Professions Scholarship Program, which remain tax-free despite service obligations.

Child Support

Child support payments are not taxable income for the recipient, nor are they deductible for the payer. Unlike alimony, which was previously taxable and deductible, child support has always been tax-free.

Divorce agreements should clearly classify payments as child support to prevent IRS reclassification. Missed child support payments do not create tax deductions for the payer, and arrears collected later remain non-taxable.

Certain Life Insurance Proceeds

Life insurance death benefits are not taxable when received as a lump sum. However, if paid in installments, any interest earned on the balance is taxable.

Selling a life insurance policy to a third party may result in taxable income if the proceeds exceed the total premiums paid. Additionally, if a policy is transferred for value, such as in a business transaction, the death benefit may be partially taxable.

Employer-Provided Benefits

Certain employer-provided benefits are excluded from taxable income, offering financial advantages beyond wages. These include health insurance, retirement contributions, and educational assistance.

Employer-paid health insurance premiums are tax-free, reducing taxable wages. Similarly, contributions to retirement plans like 401(k)s are not taxed when made, though withdrawals in retirement are. Employers can also provide up to $5,250 per year in tax-free tuition reimbursement.