Where to Find Untaxed Income on Your Tax Return

“Untaxed income” refers to specific types of income not subject to federal income tax. This is distinct from undeclared income, which is illegal. It encompasses legally excluded income, tax-exempt income, or income where tax is deferred. A tax return provides a comprehensive picture of a taxpayer’s financial activities, including amounts not contributing to current taxable income. Understanding where these items appear on tax forms helps individuals accurately report their financial situation and comply with tax laws.

Tax-Exempt Income on Your Return

Certain types of income are never subject to federal income tax. Municipal bond interest, typically issued by state or local governments, is one example. The total amount of tax-exempt interest received is reported on Form 1040, Line 2a.

Social Security benefits can be partially untaxed. The taxable amount depends on your “provisional income,” which includes adjusted gross income, tax-exempt interest, and half of your Social Security benefits. On Form 1040, total benefits are shown on Line 6a, and any taxable portion on Line 6b.

Qualified distributions from Roth IRAs are tax-exempt income. Once specific conditions are met, such as age and the five-year holding period, withdrawals from a Roth IRA are entirely tax-free. These qualified distributions are generally not reported as taxable income on Form 1040.

Tax-Deferred Income and Deductions

Some income is not taxed in the current year but will be subject to taxation later, or it may be reduced by deductions. Pre-tax contributions to retirement accounts, such as Traditional IRAs and 401(k)s, are examples of tax-deferred income. These contributions are typically excluded from your gross income in the year they are made.

Pre-tax 401(k) contributions are often noted on Form W-2, Box 12, with codes like D, E, F, G, H, or S. For Traditional IRA contributions, the deducted amount is reported on Schedule 1, Line 16. This deduction reduces your Adjusted Gross Income (AGI) on Form 1040, effectively deferring tax until withdrawal.

Health Savings Account (HSA) contributions offer a tax deferral benefit. Contributions made to an HSA are tax-deductible, reducing your taxable income for the year. Employer contributions to your HSA are typically reported on your Form W-2, Box 12, with Code W. If you make direct contributions, these are deducted on Schedule 1, Line 12. This allows funds to grow tax-free and be withdrawn tax-free for qualified medical expenses, deferring or eliminating tax on the income.

The sale of a primary residence can also involve untaxed income through the home sale exclusion. If you meet certain ownership and use tests (typically having lived in the home for at least two of the five years before the sale), you may exclude up to $250,000 of gain ($500,000 for those filing jointly) from your taxable income. While the sale might be reported on Form 8949 and Schedule D (Capital Gains and Losses), the excluded portion is not subject to tax and is accounted for by adjustments on these forms, resulting in a lower or no taxable gain reported on your Form 1040.

Income Exclusions and Adjustments

Other types of income are reported but then excluded from taxable income due to specific rules or adjustments. The Foreign Earned Income Exclusion (FEIE) is a significant example for U.S. citizens or resident aliens living and working abroad. While foreign income is generally subject to U.S. tax, the FEIE allows qualifying individuals to exclude a certain amount of their foreign earned income from U.S. taxation. For 2024, this exclusion amount is $126,500, and for 2025, it increases to $130,000.

To claim the FEIE, taxpayers must file Form 2555, Foreign Earned Income. This form is used to calculate the amount of income that can be excluded, and the excluded amount then reduces the income reported on Form 1040, typically on Schedule 1. The presence and calculations on Form 2555 directly impact the taxable income figure on the main tax return, reflecting this substantial exclusion.

Certain scholarship and fellowship income can also be untaxed. If a scholarship or fellowship is used for qualified education expenses, such as tuition, fees, books, and supplies, that portion is generally not taxable. While a Form 1098-T, Tuition Statement, may report the total scholarship amount received, only the portion used for non-qualified expenses (like room and board) is considered taxable income. The untaxed portion is simply not included in the taxable income reported on Form 1040, effectively being excluded from your gross income.