16 Types of Income the IRS Doesn’t Tax That Might Surprise You

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. However, some types of income are exempt from taxes and thus can’t be used to calculate your tax owed.

Here are 16 kinds of income the IRS won’t tax you to help get ahead financially.

If your employer provided you with paid adoption assistance, that’s nontaxable income. For 2024, the maximum amount is $16,810 per child.

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

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.

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.

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.

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.

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.

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.

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.

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's $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.

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 it must be reported as income.

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.

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.

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.

The basic exclusion amount for people who died in 2023 was $12,920,000, and for those who died in 2024, it's $13,610,000.

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.

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.

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 readiness if you retired because of an illness or injury or if your Social Security benefits took a hit from workers comp payments. 

Nobody enjoys paying taxes. And it’s to the benefit of the IRS that most people assume all their income is taxable. But that’s not always the case.

There are perfectly legal ways written into the tax code that let you take advantage of exceptions. You can use your refund wisely and take advantage of these exemptions to lower your financial stress.