What Income Is Not Taxable?

Did you know? Not all money you receive is taxable income.

Many people assume that if money hits their bank account, it automatically needs to be reported. That isn’t always true. While most earned income is taxable, certain types of income are not considered taxable under federal tax law.

Here are some common examples.

Gifts

Money received as a gift is generally not taxable income regardless of the amount. Whether someone gives you $500 or $50,000, you do not report it as income. Gift reporting rules apply to the person giving the gift, not the recipient.

https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax

Child Support

Child support payments are not considered taxable to the recipient. This has always been the case.

Alimony

For divorce agreements finalized on or after January 1, 2019, alimony payments are generally not taxable to the recipient.

https://www.irs.gov/taxtopics/tc452

Life Insurance Proceeds

Life insurance payouts received because of someone’s death are generally not taxable.

https://www.irs.gov/publications/p525

Certain Personal Injury Settlements

Compensation received for physical injury or physical sickness is often not taxable. However, certain portions — such as interest or punitive damages — may be taxable depending on the situation.

https://www.irs.gov/publications/p525

State Tax Refunds

State tax refunds are often not taxable, especially if you claimed the standard deduction in the prior year. If you itemized deductions, part of your refund may be taxable depending on your situation.

https://www.irs.gov/taxtopics/tc503

Final Thoughts

Understanding what income is not taxable can prevent unnecessary stress during tax season. However, keep in mind that every situation is different. The type of income and your overall tax picture determine how it should be handled.

If you’re unsure whether the income counts as taxable, it’s always best to review it carefully rather than assume and if you need assistance with that, please don’t hesitate to reach out to me for a review at no extra cost.