Income the IRS Can’t Touch

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By Kelley R. Taylor From Kiplinger’s Personal Finance

A frustrating thing about working hard to make money is knowing that the Internal Revenue Service (IRS) will tax a portion of your earnings. But many categories of income aren’t taxable.

Here are several of them, although in some cases whether income is taxable depends on various rules, requirements, regulations, or if you’re talking about federal or state taxes.

1) Financial Gifts

This is a well-known category of non-taxable income. That’s due in part to the generous annual federal gift tax limit. For example, for the 2024 tax year, you could give up to $18,000 to a friend, relative or anyone and not be taxed. And the recipients won’t be taxed on that amount either.

Charitable gifts are generally non-taxable. Be sure to get receipts and ensure the charities you give to are legitimate.

Unfortunately, gifts given by employers to employees that are akin to cash, i.e., gift cards, are usually considered taxable by the IRS. However, other employer-provided benefits and fringe benefits are not taxable.

2) Inheritances

The IRS does not consider inheritances to be taxable income. Remember, though, that if the money you receive from an inheritance subsequently generates income such as the interest from an interest-bearing account, those earnings may be taxable.

Additionally, although there is no federal inheritance tax, some states tax inheritances.

Note: An inheritance tax, which is levied on the heirs of the deceased, is different from the federal estate tax, which is assessed on the estate. Some states also have an estate tax.

3) Life Insurance Proceeds

The proceeds received by a beneficiary after the policyholder’s death are generally tax-free. However, interest earned on the proceeds may be taxable and tax rules can get complex if the policyholder surrenders the policy for cash.

4) Long-Term Care Insurance Income

Payments received from long-term care insurance policies are usually not subject to tax.

5) Disability Benefits

Disability and worker’s compensation payments are generally non-taxable. Supplemental Security Income payments are also tax-exempt.

6) Municipal Bond Interest

Government-issued bond interest is mostly tax-exempt, but some muni interest may be taxable at federal and state levels. For example, U.S. Treasury securities are taxable at the federal level.

7) Roth Account Income

Qualified distributions (i.e., from a Roth account at least five years old since you first contributed and when you are 59½ years or older) are tax exempt.

8) Alimony and Child Support

If you receive alimony or maintenance payments as part of a separation or divorce agreement made on or after Jan. 1, 2019, those payments are not taxable. On the other hand, if you are paying alimony under such an agreement, you cannot deduct the payments from your income tax. However, state tax treatment of alimony may differ. Child support payments are not subject to tax.

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