Who wouldn’t love to avoid paying tax on their income? Well, in some cases, you can.
Here’s what you need to know about when you can receive income without having to pay the federal government—from our Bottom Line expert Abby Eisenkraft, EA, CEO of Choice Tax Solutions, Inc.
All income is taxable unless there is an explicit provision in the Tax Code saying otherwise. In some cases, nontaxable status depends on the dollar amounts of the income and other specifics…and sometimes you’re required to report income even though it won’t be taxed. It is always best to check with a tax professional before assuming you’re scot-free.
Here are some examples of nontaxable income…
Most gifts and inheritances are nontaxable, but some must be reported to the IRS. If you receive a gift in excess of $100,000 from an overseas non-US citizen, both you and the giver must satisfy reporting requirements or face severe penalties. Domestic gifts above $19,000 per recipient (2025) require the giver to file a gift-tax return document as well.
Income from federal programs such as the Women, Infants and Children (WIC) program…Supplemental Nutrition Assistance Program (SNAP)…and Temporary Assistance for Needy Families (TANF) program are tax-free and have no reporting requirements.
If you receive a payout as the beneficiary of a life insurance policy, you are not required to pay income tax on it.
Child support is not taxable and the payor cannot claim it as a deduction. The same is true for alimony but only for settlement agreements finalized in 2018 or later.
This is nontaxable income as long as the assistance comes through a qualified fellowship or scholarship and is used for books, tuition and other expenses required by the educational institution. Employers can provide up to $5,250 per employee per year in tax-free educational benefits.
As long as you’re at least 59½ and have held the retirement account for at least five years, you can take out the money without paying tax.
They’re only tax-free if the emergency was part of a federally declared disaster. Check with your tax professional.
The adoption must have been done through a legal adoption, and there typically are rules and regulations specific to each program. Discuss this carefully with your employer and your tax professional.
To avoid tax, you must have lived in the home for two of the past five years and your profit must not exceed $250,000 for a single taxpayer or $500,000 if married filing jointly…the home must also be your primary residence and you must not have sold a primary residence and claimed the same benefit within the past two years. You also may subtract costs associated with the sale—including closing costs, commissions, attorney fees, recording fees, title search fees, etc.—as well as the cost of any major improvements you made to the home. Even though these proceeds are not taxable, you must report all of this to the IRS.
If an individual’s earned income such wages and net earnings from self-employment is below $25,000, he/she pays tax on no portion of his Social Security income. But individuals with earned incomes from $25,000 to $34,000 must pay tax on half of their Social Security benefits. People with higher incomes may have to pay tax on up to 85% of what they take in from Social Security.
The interest on municipal bonds is not taxed, but it is reported because it can impact the tax on Social Security benefits.
