IRS Tax Tip: 16 Types of Income the IRS Does Not Tax

by | Mar 11, 2024 | Taxes |

Turns out the adage that only death and taxes are certain isn’t 100% true — in a good way.

As you’re painfully aware, the federal government takes a piece of the income pie to help pay for public projects and the infrastructure we use. So do the vast majority of most states.

You see those deductions every time you look at your paycheck. But there are types of income exempt from taxes and thus can’t be usedto tally how much you owe in taxes.

Here are 16 kinds of income the IRS won’t tax you to help lower your financial stress .

  1. Adoption assistance

If your employer provided you with paid adoption assistance, that’s nontaxable income. For 2023, the max amount is $15,950 per child.

The IRS has a few rules about what qualifies as an expense, like adoption fees, court costs, and travel.

  1. Alimony

The impact of divorce on taxes is complicated and sensitive — yet another good reason to hire a tax professional instead of doing it yourself. That being said, payments you receive from alimony are not taxable.

If you’re the one doing the paying, and your divorce was after January 1, 2019, you can’t deduct alimony because of the Tax Cuts and Jobs Act.

The ins and outs of how divorce and separation agreements made after 2018 impact your taxes are documented by the IRS in Publication 504.

  1. Child support

Just as with receiving alimony payments, child care payments are not taxable income. In fact, the IRS doesn’t consider child care support to be income at all. Child care payments are never deductible either, so don’t include them on any tax forms.

  1. Credit card rewards

Most credit card rewards are not considered taxable income by the IRS. Cash back, miles, and points don’t need to be included on your return. The IRS generally treats them as rebates because you had to buy something to get them.

  1. Disability insurance

If your employer pays the premiums for your disability insurance, those payouts are taxable. But if you pay for the plan with your own money (a private disability policy), you don’t need to include disability payouts as income on your tax return.

  1. Disaster assistance

Qualified federal disaster relief payments are not taxable, as long as it isn’t also paid by insurance or some other reimbursement. To be exempt, they have to come through the Federal Emergency Management Agency.

  1. Education assistance

The money you get from your employer to help with education costs is not taxable. Up to $5,250 of those benefits can be excluded each year, and your employer shouldn’t include them in what it reports as part of your wages, tips, and other compensation.

  1. Scholarships

If you’ve received an academic scholarship, first, congratulations. And second, you don’t have to worry about it counting as taxable income — provided you meet certain conditions.

You need to be a candidate for a degree at an eligible school. You also have to use it to pay for tuition or enrollment fees, or course-related expenses. And it can’t be a form of payment for a service you’ve performed.

  1. Financial gifts

If you’re gifted money or property, you don’t have to pay taxes on it. There are some limits, however.

The gift tax exclusion cap in 2023 was $17,000 per person. In 2024, it is $18,000. The giver doesn’t usually have to pay either.

One caveat: If you’re gifted something that can make money down the line, like stock, you’ll have to pay tax on that income.

  1. Foster care

Payments you get from the state, or another eligible source, to care for a foster child are considered child support, aren’t included in your income, and thus aren’t taxed.

Getting paid to maintain an area of your home for emergency foster care is a different story and has to be reported as income.

  1. Health savings accounts (HSAs)

Health savings accounts are tax-exempt trusts established to cover qualified medical expenses. Any trustee (a bank, insurance company, or someone approved by the IRS) can set up an HSA, and there are plenty of benefits to having one.

You can deduct your contributions even if you don’t itemize. Contributions your employer makes to the HSA can also be excluded from your gross income.

  1. Home sale capital gains

If you made capital gains from selling your home, you may qualify to exclude $250,000 of it from your return, or $500,000 if you file a joint return with your spouse.


Here’s the caveat: To qualify, you need to have owned and used your home as your principal residence for two of the five years before the sale.

  1. Inheritance

Inheritances are not subject to income taxes. However, as with many things related to the IRS, there is a caveat.

If an estate is big enough, it could be subject to estate taxes, which are paid by the estate itself.

For people who died in 2023, the basic exclusion amount was $12,920,000. For those who die in 2024, the exclusion amount is $13,610,000.

  1. Life insurance payouts

If you’re the beneficiary of a loved one who dies and they had life insurance, you don’t need to report the money you receive as income. However, any interest you get is taxable and should be reported.

In addition, if you cash in on your own life insurance policy, anything over the cost of the policy has to be reported as income.

If you’re getting money from your life insurance plan due to terminal illness, it isn’t usually taxable. The same goes for periodic payouts to help handle the costs of long-term treatment for chronic illness.

  1. Roth IRA income

Retirement accounts are one of those things that are simply an excellent idea for every taxpayer. But while you can’t deduct contributions, or even report them, qualified distributions are not taxed when it comes to Roth IRAs.

  1. Workers’ compensation

If you’re getting workers’ compensation benefits, you don’t have to pay taxes on them. Nor is there tax on income from workers’ comp you get due to a workplace illness or injury.

However, it can impact the taxes for your retirement planning moves if you retired because of an illness or injury or if your Social Security benefits took a hit from workers comp payments.

Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar at 978-844-4095 to schedule a FREE one hour no obligation consultation.

Set Up A Free Initial Consultation