Everything that ‘comes in’ is not ‘in-come’
The IRS considers everything that comes under your control to be income. However, many things are ‘excluded’ from income. Exclusions don’t count in any calculation, are not reported on any tax form, and are tax-free income.
I love it when I get a call from someone asking me how much tax they will have to pay on something, and I get to say ‘zero.’ They get so excited when they have tax-free income and the taxman isn’t going to take half of it. That makes my day.
Here are a few example of “excluded” (tax-free) income:
- Inheritance – Inheritance comes to you tax-paid and at fair market value as of the day you loved-one died. Sometimes, estates continue to make money after the owner is deceased. That is taxable and comes to you on a K-1.
If you inherit tax-deferred funds like an IRA or 401k, that will be taxable. - Gifts you receive – Giver pays the tax prior to giving, if it is required.
- Loan proceeds – Loans are paid back, so they aren’t income.
- Cancelled debt on your residence (2020 rules) and any other cancelled debt if you were insolvent or bankrupt. 2026 update – Cancelled debt from your mortgage must be analyzed for taxability.
- Employee benefits (health insurance, parking space, coffee). Specific rules from the IRS govern employee benefits.
- Life insurance proceeds – Life insurance is something you buy. Beneficiaries do not pay any tax on insurance.
- Child Support – Child support is taxable income to the payer, not the person receiving it.
- Alimony from agreements dated Jan 1st 2019 and later – Spousal support is not income. The payor also pays the taxes. If you were ordered to pay spousal support prior to 2019, the old rules apply. It is taxable to the receiver.
- Government benefits – This includes EBT, WIC, TEA, and TANF.
- Insurance or legal settlements for damage to your property
- Insurance or legal settlements for bodily injury or pain and suffering. However any awards based on punitive damages or lost income or wages /ARE taxable.
- Most scholarships and grants to go to school. Check with your school or tax pro on scholarships and fellowships.
- Refundable tax credits like EIC and Child Tax Credit.
- Most profits from selling your home – When selling your home, you can exclude up to $250,000 of the profits. (500k if married)
- Credit card rewards/ miles/ points or similar cash-back programs. Points are a discount on a future purchase and are not taxed.
Check the rules on Tax-Free Income
Even though these are generally tax-free, be sure to check with your tax pro.
Note: Social Security and unemployment are NOT on the above list and ARE often taxable.
Always check the rules or ask a tax expert if you have questions.