Most income earned by U.S. citizens is subject to federal and sometimes also state and local taxation. However, not all types of income are subject to tax.
Taxable vs. Non-taxable Income
Certain kinds of income are non-taxable. In other words, this income is not subject to taxation at the federal, state or local level. With all other income, taxes are assessed by federal, state and possibly local government entities. Following are some of the most common forms of non-taxable and taxable income.
- Alimony and child support payments
- Reimbursement from qualifying adoptions
- Most healthcare benefits
- Welfare payments
- Cash rebates from retailers, manufacturers and dealers
- Life insurance policy proceeds (as a beneficiary)
- Scholarships (as long as funds are used to pay direct education expenses)
- Wages and salaries
- Strike pay
- Alimony (for divorces before 2019)
- Dividends and interest
- Stock options
- Self-employment income
- Rental income
- Some unemployment compensation
- Some fringe benefits
- Bartered property and services
- Income from offshore accounts
- Cancelled or forgiven debt
More Types of Non-Taxable Income
Here are 10 more types of non-taxable income.
1. Financial Gifts
You can give away up to $16,000 per person (as of 2022) to whoever you like without having to pay gift tax. Together, you and your spouse can give away up to $32,000 per person gift-tax free (as of 2022). Any amounts you give away above these exclusion amounts could be subject to a gift tax of between 18% and 40% in 2022, depending on the value of the gift in excess of these exclusions.
2. Educational and Adoption Assistance from Your Employer
If the company you work for provides you with educational assistance — such as paying for you to attend night school to pursue a graduate or undergraduate degree — you can exclude up to $5,250 of this assistance from your gross income. Up to $14,890 in employer-provided adoption assistance is also considered to be non-taxable income. The exact amount of your income exclusion for adoption assistance will depend on your modified adjusted gross income.
3. Employer-provided Meals and Lodging
Though these aren’t technically income, if your employer provides you with any meals or lodging, you don’t have to include their value in your taxable income. To qualify for this tax-preferential treatment, the meals and lodging must be furnished on your employer’s premises for the convenience of the employer.
4. Proceeds from a Home Sale
You can exclude up to $250,000 from the sale of your home from capital gains taxes, or $500,000 if you’re married and file a joint tax return. To qualify for this exclusion, you must have owned the home and lived in it as your principal residence for at least two of the past five years.
5. Insurance Provided by Your Employer
Several different kinds of employer-provided insurance are non-taxable. This includes accident and health insurance, long-term care insurance, coverage and reimbursement for medical care provided through a health reimbursement arrangement (HRA), and up to $50,000 of employer-provided group term life insurance. If your employer provides more than $50,000 of such insurance, the cost of the excess will be taxable to you.
6. Health Savings Accounts (HSAs)
HSA distributions are non-taxable as long as the money is used to pay for qualified healthcare expenses. A wide range of medical expenses meet this criteria including copays for regular doctor’s office visits, surgery (except cosmetic surgery), acupuncture and chiropractic treatments, dental work (including orthodontics), eyeglasses, drug prescriptions and over-the-counter medications, laboratory fees, physical therapy, and vaccines.
7. Disability Insurance Payouts
Benefits you receive from a private disability policy you own are non-taxable if you paid for the policy with after-tax dollars. However, these benefits will be taxable if they’re paid from an employer-provided disability policy for which your employer paid the premiums. Any benefits you receive from an employer-provided supplemental disability insurance policy you paid for with after-tax dollars are also nontaxable.
8. Worker’s Compensation Benefits
If you receive benefits under federal or state compensation law for a work-related injury or illness, this money is non-taxable. However, if part of these benefits reduce your Social Security or railroad retirement benefits, this part could be taxable. And if you return to work on light duty, the income you earn could also be taxable.
9. Municipal Bond Interest
Municipal (or muni) bonds are one of the few types of bonds that offer non-taxable income to investors. These bonds are issued by state and local government entities. In addition to tax-free income at the federal level, muni bonds are also tax-free at the state and local levels for residents of the state in which the bond was issued. The tax exemption applies regardless of whether you purchase individual municipal bonds or invest in muni bonds through a bond fund or ETF.
10. Income from a Roth Retirement Account
One of the biggest benefits of Roth IRAs, 401k plans and 403(b)s is the fact that they offer non-taxable income. In other words, you can withdraw money from your account tax-free after you retire. This is in contrast to traditional IRAs, 401k plans and 403(b)s that are taxable even in retirement, though they do offer tax-deferral.
Certain rules must be followed to qualify for these tax-free withdrawals in retirement. For example, you must be over age 59½ when taking the withdrawals and the withdrawals must be taken at least five years after the account was established.
Next Steps for You
With some planning, you can boost your non-taxable income. Here are a few follow up suggestions for you.
- Consult with a tax professional for advice and guidance in your specific situation.
- Contribute significant amounts to retirement savings plans.
- Consider other ways to reduce your taxable income for a $0 tax bill.
As you maximize your non-taxable income, you can also stay on top of your finances year round with free, online financial tools like those offered by Personal Capital. Millions of people use this powerful technology to see all of their financial accounts in one place in order to manage their money and plan for long-term goals.