Untaxed income is money you receive that federal law specifically excludes from your gross income, so it never shows up as taxable on your federal return. Common examples include child support, gifts and inheritances, life insurance death benefits, workers’ compensation, municipal bond interest, and certain retirement contributions. Even though the IRS does not tax this money, it can still count against you: the Department of Education factors it into financial aid, and programs like Medicaid and marketplace subsidies add some of it back when checking eligibility.
Common Sources of Untaxed Income
Child Support
Child support payments are not taxable to the parent who receives them, and the paying parent cannot deduct them either.1Internal Revenue Service. Alimony, Child Support, Court Awards, Damages 1 Federal law treats the money as a neutral transfer meant to support the child, not as income to the receiving parent.
Gifts and Inheritances
Money or property you receive as a gift or through an inheritance is not included in your gross income.2Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances Any gift tax responsibility falls on the giver, not you. For 2026, a donor can give up to $19,000 per recipient per year without triggering gift tax reporting.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 One caveat: once you own the gifted property, any income it later generates (interest, dividends, rent) is taxable to you.
Life Insurance Proceeds
If you are the beneficiary of a life insurance policy, the death benefit is generally excluded from your gross income, whether it comes as a lump sum or in installments.4Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits Interest that accumulates on unpaid proceeds after the insured’s death is taxable, however.
Workers’ Compensation
Payments under a workers’ compensation program for a job-related injury or illness are fully tax-free, and the same exclusion applies to survivor benefits.5Internal Revenue Service. Publication 525 (2024), Taxable and Nontaxable Income The exclusion does not cover retirement plan benefits based on your age or years of service, even if you retired because of a workplace injury. If you return to work on light duty, those wages are taxable like any other salary.
Municipal Bond Interest
Interest earned on bonds issued by a state, the District of Columbia, or a U.S. territory is generally excluded from federal income tax.6Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds You still have to report it on Form 1040, line 2a, for information purposes only.7Internal Revenue Service. Topic No. 403, Interest Received
Employer-Paid Health Insurance
The premiums your employer pays toward your health coverage are not part of your income.8Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans The dollar amount shows up on your W-2 in Box 12, code DD, purely for informational purposes.
Retirement Contributions and Distributions
Retirement-related untaxed income splits into two categories. Some money is only tax-deferred, meaning you skip tax now and pay later. Other money is permanently excluded.
Traditional 401(k) and 403(b) Deferrals
When you contribute part of your paycheck to a traditional 401(k) or 403(b), that amount is subtracted from your taxable wages for the year. Your employer reports it on your W-2 but does not include it in Box 1.9Internal Revenue Service. Retirement Topics – Contributions For 2026, the combined elective deferral limit across these plans is $24,500.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026 This is deferral, not permanent exclusion. You will owe income tax on these contributions and their earnings when you take withdrawals in retirement.
Health Savings Account Contributions
HSA contributions your employer takes from your paycheck are excluded from your gross income entirely.11Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts If you contribute on your own, you claim a deduction on your return. For 2026, the limit is $4,400 for self-only coverage and $8,750 for family coverage.12Internal Revenue Service. Notice 2026-5, Expanded Availability of Health Savings Accounts HSA withdrawals for qualified medical expenses are also tax-free, so the money can stay completely untaxed from paycheck to spending.
Qualified Roth IRA Distributions
Roth IRA withdrawals are excluded from gross income if they qualify. Generally, the account must have been open at least five years and you must be at least 59½, disabled, or a beneficiary receiving the funds after the account holder’s death.13Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs Because Roth contributions are made with after-tax dollars, both your contributions and their earnings can come out tax-free once the distribution qualifies.
When Social Security Benefits Are Untaxed
Social Security benefits can be fully untaxed, partially taxed, or up to 85% taxable depending on your other income. The IRS uses “combined income” — your adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits — to decide.14Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
- Below $25,000 (single) or $32,000 (joint): none of your benefits are taxable.
- $25,000–$34,000 (single) or $32,000–$44,000 (joint): up to 50% may be taxable.
- Above $34,000 (single) or $44,000 (joint): up to 85% may be taxable.
These thresholds are set by statute and have never been adjusted for inflation, so more retirees cross into taxable territory each year. For someone with modest retirement income, Social Security often remains entirely untaxed.
Where Untaxed Income Still Counts Against You
Not owing tax on money is not the same as making it invisible. Two systems in particular reach past your taxable income to pull untaxed amounts back in.
The FAFSA
The 2026–27 FAFSA pulls tax return data directly from the IRS and asks you to confirm specific untaxed amounts:
- Tax-exempt interest income (Form 1040, line 2a)
- Untaxed portions of IRA distributions (line 4a minus 4b)
- Untaxed portions of pensions (line 5a minus 5b)
These fields appear for the student, student’s spouse, parents, and parent’s spouse or partner.15Federal Student Aid. 2026-27 FAFSA Form Your school may also request retirement plan deferrals shown in W-2 Box 12 during verification.
Health Coverage and Medicaid MAGI
Marketplace subsidies (premium tax credits and cost-sharing reductions) use Modified Adjusted Gross Income, which adds three untaxed items to your AGI: nontaxable Social Security benefits, tax-exempt interest, and excluded foreign income.16CMS. Job Aid: Income Eligibility Using MAGI Rules A higher MAGI can reduce or eliminate subsidies your taxable income alone would have qualified you for.
Medicaid uses a nearly identical MAGI formula. Supplemental Security Income is never counted.17Medicaid.gov. MAGI 2.0: Building MAGI Knowledge Part 2 – Income Counting Someone with taxable wages and untaxed Social Security can end up over the Medicaid threshold even when the tax return alone looks modest.
How to Find Your Untaxed Income on Your Forms
No single document captures all of it. Pull from several.
Your W-2 shows retirement plan deferrals in Box 12. Codes D (401(k)), E (403(b)), F (SEP), G (457(b)), H (501(c)(18)), and S (SIMPLE IRA) each represent elective contributions that reduced your taxable wages.18Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) Code DD shows employer-sponsored health coverage cost, reported for information only.
Form 1099-R reports distributions from pensions, annuities, retirement plans, and insurance contracts. Box 5 shows the portion representing your own after-tax contributions, which you can recover tax-free.19Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) Comparing Box 2a (taxable amount) to Box 1 (gross distribution) tells you how much was untaxed.
Form SSA-1099 reports your Social Security benefits. Box 5 shows net benefits paid, which is Box 3 minus any repayments in Box 4.20Social Security Administration. POMS GN 05002.014 – Social Security Statement Box 5, Net Benefits Subtract whatever you reported as taxable on your return from Box 5 to find your untaxed portion. If your combined income fell below the thresholds above, the whole Box 5 amount is untaxed.
For tax-exempt municipal bond interest, look at Form 1099-INT or Form 1099-OID from your brokerage. Any tax-exempt interest of $10 or more is reported to you and belongs on your return even though it is not taxed.7Internal Revenue Service. Topic No. 403, Interest Received Keep these forms organized if you apply for aid or benefits, because the programs above count that interest as part of your income.