Additional Coverage:
- 16 Types of Income the IRS Doesn’t Tax That Might Surprise You (financebuzz.com)
Good News, Taxpayers: 16 Types of Income the IRS Won’t Touch!
We all know the drill: income earned, taxes paid. It feels like an unavoidable truth, right up there with, well, you know.
But hold on to your wallets, because it turns out there are some sweet exceptions to the rule! While the federal government and most states do take their slice of your hard-earned cash to keep our public services humming, not every dollar you bring in is fair game for Uncle Sam.
You see those deductions on your paycheck and probably sigh a little. But what if we told you there are certain types of income that are completely tax-exempt? That means they won’t even be used to calculate your tax liability, potentially leaving more money in your pocket!
Ready to get ahead financially? Here are 16 kinds of income the IRS won’t tax, helping you make the most of your money:
1. Adoption Assistance
If your employer lends a helping hand with adoption costs, that assistance is generally non-taxable. For 2026, you could exclude up to $17,670 per child. Just be aware that the IRS has specific guidelines on what qualifies as an eligible expense, such as adoption fees, court costs, and travel.
2. Alimony (Received)
Divorce and taxes can be a messy combination, often best navigated with a tax professional. However, if you are the recipient of alimony payments, good news: they are not considered taxable income for you. A quick heads-up for those paying alimony: if your divorce was finalized after January 1, 2019, you can no longer deduct those payments due to the Tax Cuts and Jobs Act.
3. Child Support
Similar to alimony received, child support payments are not taxable income. In fact, the IRS doesn’t even categorize child support as income at all.
On the flip side, these payments are never deductible, so keep them off your tax forms. For the 2026 tax year, the refundable portion of the child tax credit remains at $1,700 per qualifying child.
4. Credit Card Rewards
Most of those fantastic credit card rewards – think cash back, miles, or points – are considered by the IRS to be rebates rather than taxable income. Since you typically need to make a purchase to earn them, they usually don’t need to be included on your tax return.
5. Disability Insurance Payouts (Privately Paid)
Here’s a distinction to note: if your employer covers the premiums for your disability insurance, any payouts you receive are taxable. However, if you’re the one paying for your private disability policy out of your own pocket, you won’t need to report those disability payouts as income.
6. Disaster Assistance
When disaster strikes, qualified federal disaster relief payments can offer a lifeline. These payments are not taxable, provided they aren’t already covered by insurance or another form of reimbursement.
7. Education Assistance
Employer-provided funds to help with your education costs are often non-taxable. You can exclude up to $5,250 of these benefits each year, and your employer shouldn’t include them in your reported wages.
8. Scholarships
Congratulations on that scholarship! Even better, it’s generally not considered taxable income, as long as you meet a few conditions. You need to be a degree candidate at an eligible school, use the funds for tuition, enrollment fees, or course-related expenses, and it can’t be payment for services rendered.
9. Financial Gifts
If you’re lucky enough to receive a monetary or property gift, you typically won’t owe taxes on it. There are some limits, though: the gift tax exclusion cap for 2026 is $19,000, and usually, the giver doesn’t pay either. One important note: if the gift is something that could generate income later, like stock, you’ll need to pay tax on that future income.
10. Foster Care Payments
Payments received from the state or other qualified sources for caring for a foster child are treated as child support. This means they are not included in your income and therefore not taxed. However, if you’re paid to maintain a specific area of your home for emergency foster care, that does need to be reported as income.
11. Health Savings Accounts (HSAs)
HSAs are a fantastic tool for managing medical expenses. These tax-exempt trusts allow you to deduct your contributions even if you don’t itemize, and any contributions your employer makes are also excluded from your gross income.
12. Home Sale Capital Gains
Good news for homeowners! If you sold your home in 2026 and realized a capital gain, you might be able to exclude up to $250,000 from your taxable income ($500,000 for married couples filing jointly).
To qualify, you must have owned and used the home as your primary residence for at least two of the five years leading up to the sale. Gains above these amounts could be taxed at rates of 0%, 15%, or 20%, depending on your overall taxable income.
13. Inheritance
Inheritances are generally not subject to income taxes. However, for larger estates, there could be estate taxes, which are paid by the estate itself. The basic exclusion amount for those who passed away in 2026 is $13,990,000, rising to $15 million in 2026, which should save more estates from federal tax.
14. Life Insurance Payouts
If you’re the beneficiary of a life insurance policy, the money you receive after a loved one passes away usually doesn’t need to be reported as income. Be aware, though, that any interest earned on those funds is taxable.
Also, if you cash in your own life insurance policy, any amount exceeding the policy’s cost must be reported as income. Payouts due to terminal illness or for long-term chronic illness treatment are typically not taxable.
15. Roth IRA Income
Roth IRAs are a smart move for retirement planning. While you can’t deduct contributions, the big benefit is that qualified distributions from your Roth IRA are not taxed!
16. Workers’ Compensation
Receiving workers’ compensation benefits? You won’t have to pay taxes on them, nor on income from workers’ comp received due to a workplace illness or injury. However, be aware that these payments could potentially impact the taxes on your retirement readiness if you retired due to an illness or injury, or if they affect your Social Security benefits.
The Bottom Line
Nobody enjoys paying taxes, and it’s easy to assume all your income is taxable. But that’s simply not true!
The tax code offers perfectly legal ways to take advantage of these exceptions. Understanding these non-taxable income streams can help you make smarter financial decisions, potentially boosting your savings and building more wealth.
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- 16 Types of Income the IRS Doesn’t Tax That Might Surprise You (financebuzz.com)