Federal tax law starts by treating every dollar you receive as taxable, then carves out specific exceptions. The main types of non-taxable income include child support, most personal injury settlements, life insurance death benefits, gifts and inheritances, municipal bond interest, qualified Roth IRA and HSA withdrawals, up to $500,000 of gain on the sale of a home, VA disability benefits, employer-paid health premiums, and qualified scholarships. Each has its own conditions, and missing one can turn tax-free money into a reportable line on your return.
Personal Payments That Aren’t Taxed
Child support is the cleanest case. Payments you receive for your child are never taxable to you, and the paying parent gets no deduction.1Internal Revenue Service. Alimony, Child Support, Court Awards, Damages 1
Alimony depends on when your agreement was signed. For divorce or separation agreements executed after December 31, 2018, alimony is tax-free to the recipient and not deductible by the payer. Older agreements still follow the prior rule, with the recipient reporting it as income.2Internal Revenue Service. Divorce or Separation May Have an Effect on Taxes
Workers’ compensation for a job-related injury or illness is fully exempt from federal tax.3Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income – Section: Workers’ Compensation The exemption stops at retirement benefits paid based on age or years of service, even if you retired because of a workplace injury.
Disability insurance is trickier: the tax treatment turns on who paid the premiums. Premiums you paid yourself with after-tax dollars produce tax-free benefits. Premiums paid by your employer produce taxable benefits. If you split the cost, only the employer’s share flows through to taxable income.4Internal Revenue Service. Life Insurance and Disability Insurance Proceeds 1 Paying premiums through a cafeteria plan on a pre-tax basis counts as employer-paid, which makes the resulting benefits fully taxable.
Public assistance and welfare benefits are generally excluded from income. Federal disaster relief payments also qualify when they reimburse reasonable expenses such as temporary housing, home repairs, funeral costs, or replacement of personal belongings lost in a federally declared disaster.5Office of the Law Revision Counsel. 26 U.S.C. 139 – Disaster Relief Payments The exclusion only covers expenses insurance didn’t already cover.
Injury Settlements and Damages
Compensatory damages for a physical injury or physical sickness are excluded from gross income whether you settle or win at trial, and whether the money arrives as a lump sum or in installments.6Office of the Law Revision Counsel. 26 U.S.C. 104 – Compensation for Injuries or Sickness A $50,000 settlement covering medical bills and pain from a car accident is entirely tax-free.
Emotional distress alone is different. Damages for emotional distress without an underlying physical injury are taxable. You can still exclude the portion that reimburses actual medical care costs you incurred to treat that distress.6Office of the Law Revision Counsel. 26 U.S.C. 104 – Compensation for Injuries or Sickness Punitive damages are always taxable, regardless of the type of case, because they punish the defendant rather than make you whole.
Life Insurance Proceeds
Life insurance proceeds paid to you as a named beneficiary because of the insured’s death are not included in your gross income.7Internal Revenue Service. Life Insurance and Disability Insurance Proceeds A $500,000 death benefit arrives tax-free. If the insurer holds the proceeds and pays interest on them, that interest portion is taxable.
The exclusion extends to accelerated death benefits paid under a policy while the insured is still alive but terminally or chronically ill.7Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
There is one situation where a death benefit becomes taxable. Under the transfer-for-value rule, if the policy was transferred to you in exchange for money or other valuable consideration, only what you paid for the policy plus premiums you covered afterward is tax-free; the rest is taxed as ordinary income. Exceptions exist for transfers to a partner of the insured, to a partnership where the insured is a partner, and a few other specific relationships.
Gifts and Inheritances
Property or money you receive as a gift, bequest, or inheritance is not included in your gross income.8Office of the Law Revision Counsel. 26 U.S.C. 102 – Gifts, Bequests, and Inheritances A $500 birthday check and a $2 million inherited house get the same treatment on your return. For 2026, a donor can give up to $19,000 per recipient per year without filing a gift tax return or using any of their lifetime exemption.9Internal Revenue Service. What’s New — Estate and Gift Tax – Section: Annual Exclusions The lifetime estate and gift tax exemption for 2026 is $15 million per individual, or up to $30 million for a married couple. The One Big Beautiful Bill Act removed the sunset that would have cut this amount roughly in half.
The tax-free treatment applies to the transfer, not to what the asset earns afterward. Inherit an apartment building and the inheritance itself is not income, but every rent check you collect is.8Office of the Law Revision Counsel. 26 U.S.C. 102 – Gifts, Bequests, and Inheritances Cash gifted into a savings account is tax-free, but the interest it earns is not.
Inherited assets carry one additional advantage: the cost basis resets to fair market value on the date of death.10Internal Revenue Service. Gifts and Inheritances If a parent bought stock for $10,000 that was worth $200,000 at their death, your basis is $200,000. Sell it the next day for $200,000 and you owe no capital gains tax. Gifted assets generally carry over the donor’s original basis, so a later sale can trigger a larger taxable gain.
Investment and Retirement Income That Comes Out Tax-Free
Municipal Bond Interest
Interest on bonds issued by state and local governments is excluded from federal gross income.11Office of the Law Revision Counsel. 26 U.S.C. 103 – Interest on State and Local Bonds You still report the interest on your return because it can affect the taxability of Social Security benefits and other income-tested calculations. The federal exclusion doesn’t automatically extend to state income tax; most states exempt their own bonds but tax interest from bonds issued by other states.
Roth IRA Withdrawals
Roth IRA contributions are made with after-tax money, and qualified distributions come out completely excluded from gross income.12Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs Qualified means you’re at least 59½ and the account has been open for at least five tax years. Meet both and everything you withdraw, contributions and decades of growth alike, is tax-free. For 2026, the contribution limit is $7,500 per year, or $8,600 if you’re 50 or older.13Internal Revenue Service. Retirement Topics – IRA Contribution Limits Eligibility phases out at higher incomes.
HSA Withdrawals for Medical Expenses
Health Savings Accounts get three layers of tax treatment: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.14Office of the Law Revision Counsel. 26 U.S.C. 223 – Health Savings Accounts Qualified expenses include doctor visits, prescriptions, surgery, and menstrual care products. Withdrawals for non-medical purposes before age 65 trigger income tax plus a 20% penalty. For 2026, contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, and you must be enrolled in a high-deductible health plan.
Gain on the Sale of Your Home
When you sell your primary residence at a profit, you can exclude up to $250,000 of capital gain from income, or up to $500,000 if you’re married and filing jointly.15Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence You must have owned and used the home as your principal residence for at least two of the five years before the sale. For joint filers claiming the full $500,000, both spouses must meet the use test, either spouse must meet the ownership test, and neither can have claimed this exclusion in the prior two years.
The exclusion is renewable every two years, so homeowners who move periodically can shelter substantial gains over a lifetime. Only gain above the limit is taxed. A surviving spouse who sells within two years of their partner’s death can still claim the full $500,000 exclusion.15Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence
Social Security and VA Benefits
Social Security is tax-free for many retirees but becomes partly taxable as other income rises. The IRS uses “combined income,” which is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. Below $25,000 for a single filer or $32,000 for a married couple filing jointly, none of your benefits are taxed.16Office of the Law Revision Counsel. 26 U.S.C. 86 – Social Security and Tier 1 Railroad Retirement Benefits Above those thresholds, up to 50% of benefits become taxable. Once combined income exceeds $34,000 (single) or $44,000 (joint), up to 85% can be taxed. These thresholds are written into the statute and have never been adjusted for inflation.
VA disability compensation and pension payments are fully excluded from gross income, whether received by the veteran or by family members.17Internal Revenue Service. Veterans Tax Information and Services
Employer Benefits Excluded From Wages
Employer-paid health insurance is one of the largest exclusions in the Code. The value of medical coverage your employer provides is not added to your taxable wages.18Office of the Law Revision Counsel. 26 U.S.C. 106 – Contributions by Employer to Accident and Health Plans
Group term life insurance receives favorable treatment for the first $50,000 of employer-provided coverage.19Office of the Law Revision Counsel. 26 U.S.C. 79 – Group-Term Life Insurance Purchased for Employees Coverage above that generates taxable income based on standardized IRS cost tables tied to your age, not the actual premium.
For 2026, employers can provide up to $340 per month in transit passes, vanpool benefits, or qualified parking with no addition to taxable wages.20Internal Revenue Service. 2026 Publication 15-B De minimis benefits such as occasional office snacks, personal use of the copier, or small holiday gifts are excluded when infrequent and low in value.
Employer-provided educational assistance under a qualified program is excluded up to $5,250 per year, covering tuition, fees, books, and supplies for courses that don’t need to be job-related.21Internal Revenue Service. Frequently Asked Questions About Educational Assistance Programs The provision letting employers also make tax-free payments toward employee student loans expired at the end of 2025 unless Congress extends it.
Scholarships and 529 Withdrawals
Scholarship and fellowship grants are excluded from income if you’re a degree candidate at an eligible educational institution and you use the funds for tuition and required expenses such as fees, books, and equipment mandated by your courses.22Office of the Law Revision Counsel. 26 U.S.C. 117 – Qualified Scholarships Money spent on room and board, travel, or optional equipment does not qualify and must be reported as income. Stipends paid in exchange for teaching or research services are taxable wages regardless of how you spend them. Keep records showing how the money was allocated.
Earnings in a 529 education savings plan grow tax-free, and withdrawals are excluded from income when used for qualified education expenses at an eligible institution. Qualified expenses are broader than the scholarship rules and include tuition, fees, books, room and board, computer equipment, and related software. Plans also allow up to $10,000 per year in tax-free withdrawals for K-12 tuition at public, private, or religious schools.23Internal Revenue Service. 529 Plans: Questions and Answers Non-qualified withdrawals trigger income tax on the earnings portion plus a 10% penalty. Under the SECURE 2.0 Act, unused 529 funds can be rolled over to a Roth IRA for the beneficiary, subject to annual contribution limits and a $35,000 lifetime cap.