The 2025 tax landscape has changed due to the GOP tax and spending law, referred to by some as the “big, beautiful bill,” signed by President Trump on July 4, 2025.
This multibillion-dollar legislation impacts everything from car loan interest to overtime pay and reported cash tips.
While it may provide some taxpayers with opportunities to save, the bill also creates some confusion regarding which income types are really non-taxable and what, if any, new rules apply.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
So, here’s more to know about non-taxable income and updates from the 2025 tax law that could affect your next tax bill.
Taxable and nontaxable income examples
When people talk about income and taxes, it’s important to distinguish between nontaxable income and tax deductions.
- Nontaxable income is exactly what it sounds like: income that the IRS doesn’t consider taxable.
- It is excluded from your gross income/exempt from federal income tax by law.
- You generally don’t report most of this income on your tax return, since it’s not subject to tax. (More on types of nontaxable income below.)
On the other hand, tax deductions reduce your taxable income but don’t necessarily transform taxable income into nontaxable income.
So, for example, you may have heard about the new car loan interest deduction, which allows eligible taxpayers to deduct up to $10,000 of interest paid on new U.S.-assembled, qualifying vehicle loans.
That tax break will reduce taxable income for those who properly claim it, but it doesn’t mean that car loan interest is “nontaxable income.” (Loan interest isn't classified as income to the borrower — it's an expense, and sometimes, expenses are tax-deductible).
Understanding the difference is key to interpreting tax changes and managing expectations when it comes to your tax burden. So, let’s dive into some types of income the IRS doesn’t tax.
How much of a financial gift is tax-free?
Financial gifts are a well-known category of non-taxable income. That's due in part to the generous annual federal gift tax limit.
The annual federal gift tax exclusion increased to $19,000 per individual for 2025, enabling folks to give that amount to any recipient without triggering gift tax or filing requirements. Recipients also don’t pay tax on these gifts.
- Unfortunately, gifts given by employers to employees that are akin to cash, i.e., gift cards, are usually considered taxable by the IRS.
- Charitable gifts are generally nontaxable (the donor doesn't pay tax on the amount given). Be sure to get receipts and ensure the charities you give to are legitimate, since the gift/donation may reduce taxable income as a deduction.
Related Deduction: Starting in 2026, taxpayers who take the standard deduction can claim an above-the-line deduction for charitable contributions — up to $1,000 for individuals and $2,000 for joint filers. Donations to donor-advised funds and private foundations will be excluded.
Are inheritances taxable?
Inheritances remain non-taxable at the federal level. That includes inheritances of cash, property, etc.
But remember that if the money you receive from an inheritance subsequently generates income, like the earnings from an interest-bearing account, it might be taxable.
Also, states like Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania continue to impose inheritance taxes at varied rates.
- Meanwhile, the current federal estate tax exemption amount for 2025 is $13.99 million per individual and $27.98 million for married couples filing jointly.
- This means estates valued below these thresholds generally avoid federal estate tax in 2025.
- About a dozen states have estate taxes.
Notable: Under the 2025 Trump tax law, the estate tax exemption amount will increase to $15 million per individual and $30 million for married couples beginning in 2026, indexed for inflation thereafter.
Roth account rules
Qualified distributions (i.e., from a Roth account at least five years old since you first contributed and when you're age 59½ or older) are tax-exempt.
The IRS now allows you to make regular contributions to your Roth IRA at any age. You can leave any amount in your Roth IRA for as long as you live.
- Earnings are tax-free if the account has been open for at least five years and the owner is 59½ years old or older.
- Early withdrawal of earnings is taxable and penalized unless exceptions apply (e.g., disability, first-time homebuyer expenses).
Are Roth Conversions Taxable? Roth conversions are taxable. The amount converted is added to your taxable income for the year of the conversion and taxed at ordinary income tax rates. Consult a trusted tax professional with questions or concerns about your retirement savings account(s).
Nontaxable fringe benefits and HSA contribution tax benefits
Employer-paid health insurance remains tax-exempt, along with up to $50,000 of group term life insurance and employer contributions to Health Savings Accounts (HSAs).
Qualified HSA distributions for medical expenses are tax-free; non-qualified distributions face tax and a 20% penalty unless the account holder is age 65 or older.
Is Social Security taxable in 2025?
Disability payments, workers’ compensation, Supplemental Security Income (SSI), and Veterans Affairs disability pensions generally remain non-taxable.
Important: Despite the Trump administration's claims to the contrary, Social Security benefits are not universally tax-free in 2025. Instead, up to 85% of benefits remain subject to federal tax depending on your income level.
For more information, see No Social Security Tax Changes in Trump's New Bill.
Also, some states tax Social Security income in 2025.
Life Insurance proceeds
Life insurance death benefits paid to beneficiaries generally escape income tax.
However, interest earned on the proceeds might be taxable, and tax rules can get complex if the policyholder surrenders the policy for cash. Loans against policies are usually non-taxable if policy conditions are met.
Note: The IRS has an online tool that can help determine whether life insurance policy proceeds you've received are taxable.
Capital gains and muni bond interest
Interest from government-issued bonds is mostly tax-exempt, though some municipal bond interest may be taxable. U.S. Treasury securities are taxable federally, while corporate bond interest is taxable at both federal and state levels.
The capital gains exclusion for primary residence is $250,000 for single filers and $500,000 for those married filing jointly, subject to ownership/use rules.
Capital losses can offset gains, with up to $3,000 deductible annually, and excess losses may be carried forward.
What about overtime pay and no tax on tips?
The new tax deductions for overtime pay and reported tips allow some workers to reduce their taxable income by amounts up to set limits.
But it's important to remember that overtime pay and tips are still considered taxable income subject to payroll taxes and reporting.
‘No tax on tips’ explained
Under the 2025 tax bill, eligible workers can deduct up to $25,000 annually from taxable income for “qualified tips" starting in 2025 and through 2028.
The deduction phases out above $150,000 MAGI for singles and $300,000 for joint filers.
The IRS and Treasury Department have identified 68 occupations that typically receive tips, including but not limited to:
- Food and beverage workers (bartenders, wait staff, cooks)
- Entertainment workers (musicians, dancers, DJs)
- Hospitality staff (bellhops, maids, concierges)
- Home service providers (plumbers, electricians)
- Personal care professionals (hairstylists, massage therapists)
Tips must be voluntary cash or equivalent (includes electronic tips).
No tax on overtime pay?
Under the 2025 tax bill, eligible workers can deduct up to $12,500 of overtime pay ($25,000 for joint filers) from their federal taxable income for tax years 2025 through 2028.
The tax break applies to the portion of overtime pay that exceeds your regular hourly rate — typically the half-time premium mandated under federal labor law.
- The benefit phases out for incomes above $150,000 (single) or $300,000 (married filing jointly).
- This deduction applies only to W-2 employees whose overtime meets federal standards and reduces income tax liability without affecting payroll taxes like Social Security or Medicare.
Other types of non-taxable income
Long-Term Care Insurance: Benefits received from tax-qualified long-term care policies are generally tax-free.
Alimony and Child Support: Alimony payments received under divorce or separation agreements executed after 2018 are not taxable income to the recipient, nor deductible by the payer. Child support payments are nontaxable income and aren’t tax-deductible.
Annuities: Generally, annuities purchased with after-tax dollars are not taxed on the principal when withdrawn; only earnings (investment gains) are taxable when payments or withdrawals are made. Annuities funded with pre-tax dollars have different rules.
States with no income tax
As mentioned, some states tax inheritances, estates, or Social Security benefits even though they are federally exempt.
If you live in one of the nine states without personal income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming — you won't be taxed on your earned income at the state level. But worthy of note:
- Washington State has a capital gains tax.
- New Hampshire eliminated its interest and dividend income tax.
Additionally, while some portion of your Social Security benefits might be subject to federal tax, most states don't tax Social Security income.
For more information, see Kiplinger's list of states that still tax Social Security.
Tax changes 2025: Bottom line
New rules and changes in the 2025 tax law mean it’s more important than ever to understand taxable and nontaxable income.
Consult a tax professional for personalized advice to help ensure you take full advantage of federal and state tax incentives available to you and avoid any potential pitfalls that could arise.
Related
-
Three Popular Tax Breaks Are Gone for Good in 2026Tax Breaks Here's a list of federal tax deductions and credits that you can't claim in the 2026 tax year. Plus, high-income earners could get hit by a 'surprise' tax bill.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
Three Popular Tax Breaks Are Gone for Good in 2026
Tax Breaks Here's a list of federal tax deductions and credits that you can't claim in the 2026 tax year. Plus, high-income earners could get hit by a 'surprise' tax bill.
-
Tax Brackets 2025 Quiz: How Much Do You Know?Quiz Test your knowledge of IRS rules that impact how much money you keep in your wallet.
-
About 40% of Heirs Say They Can’t Afford an Inherited HomeEstate Planning The ‘Great Wealth Transfer’ may not help with high property taxes, soaring homeownership costs, and liquidity issues in 2025.
-
Retirees Face a Growing Capital Gains Tax Trap: What's Next?Home Sales A changing housing market and unchanged IRS exclusion amounts can add up to a headache for many homeowners. Will Congress offer a fix?
-
New York Inflation Refund Checks Are Coming Soon: What to Know NowTax Relief Inflation relief checks are on the way for over 8 million New York taxpayers. Here's a full breakdown of who gets a payment and when you may expect yours.
-
Mortgage Refinance in 2025? These Tax Breaks Can Boost Your SavingsTax Breaks Refinancing your mortgage comes with tax implications, but also opportunities to deduct certain expenses on your return.
-
IRS Paper Checks Deadline: What Happens After September 30?Tax Changes Avoid delays when IRS tax refunds and Social Security paper checks are cut off. Here’s what to know.
-
New IRS Start Date for Mandatory Roth Catch-Up ContributionsRetirement Savings The IRS has clarified some questions surrounding new catch-up contribution rules for retirement savings plans.
