Types of Income the IRS Doesn't Tax: What to Know for 2025

A frustrating thing about working hard to earn money is knowing the IRS will tax a portion of your earnings. Federal taxable income generally includes wages, tips, royalties, commissions and for some, up to 85% of Social Security benefits. That's not an exhaustive list.

However, several types of income aren't taxable in the eyes of the IRS. Generally, whether income is taxable depends on various rules, requirements and regulations or whether you're talking about federal or state taxes.

To help sort through it, here are some common types of nontaxable income. It's good to consult a trusted tax professional or financial adviser if you're uncertain about your tax burden and how to minimize it.

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What income is not taxed by the IRS?

Note: The following are examples of nontaxable income. (This list is not all-inclusive.) In some cases, you might have to report nontaxable income on your federal income tax return even though it isn't subject to tax.

For more information on what the IRS considers taxable, see IRS Publication 525.

Financial gifts

Financial gifts are a well-known category of non-taxable income. That's due in part to the generous annual federal gift tax limit.

For example, you can give up to the limit to friends, family or anyone else and not be taxed. (The recipients won't be taxed on that amount, either.)

The tax limit for gifts given in 2024 has risen to $18,000 (from $17,000 the prior tax year). This is one of many IRS provisions adjusted annually for inflation, so you can give up to that amount to as many people as you want without incurring tax liability. (The 2025 exclusion is $19,000 for individuals and $38,000 for married couples.)

Note: Staying under these limits per recipient exempts you from filing a gift tax return for the year. But exceeding the limit doesn't necessarily result in owing tax, thanks to a high lifetime estate and gift tax exemption.

• Charitable gifts are generally nontaxable. Be sure to get receipts and ensure the charities you give to are legitimate.
• Unfortunately, gifts given by employers to employees that are akin to cash, i.e., gift cards, are usually considered taxable by the IRS.

However, some other employer-provided benefits and fringe benefits are not taxable. Examples include employer-provided health insurance, up to $50,000 of group term life insurance provided by your employer, and employer contributions to your health savings account (HSA) if you have one.

Generally, distributions from your HSA for qualified medical expenses are tax-free, while HSA distributions used for other purposes are subject to an additional 20% tax penalty.

If you are 65 or older, you can withdraw HSA funds for nonmedical expenses without paying the additional tax penalty. However ordinary income tax rates still apply to distributions for costs other than qualified medical expenses.

Are inheritances taxable income?

The IRS doesn't consider inheritances to be taxable income. That includes inheritances of cash, property, etc.

Remember that if the money you receive from an inheritance subsequently generates income, such as the earnings from an interest-bearing account, might be taxable.

• Additionally, although there is no federal inheritance tax, some states tax inheritances.
• As of 2025, these states are Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. (Iowa fully phased out its inheritance tax for deaths occurring on or after January 1, 2025.)
• However, due to varying exemptions, few taxpayers pay state inheritance taxes overall.

Note: Not to be confused with inheritance tax (which is levied on the heirs of the deceased), the limit for the federal estate tax (levied on the estate) is quite high (i.e., $13.99 million for 2025), so most taxpayers can avoid the tax. (That's a combined exemption for married couples of $27.98 million.)

Meanwhile, as of 2025, about a dozen states and the District of Columbia levy an estate tax. Estate tax thresholds vary widely at the state level.

Life insurance proceeds

Life insurance policy proceeds received by a beneficiary after the policyholder's death are generally tax-free. However, interest earned on the proceeds might be taxable, and tax rules can get complex if the policyholder surrenders the policy for cash.

Also, if you take a life insurance policy loan, the loan generally isn't taxable if the policy remains in force and the loan amount doesn't exceed the amount of policy premiums paid.

The IRS has an online tool that can help determine whether life insurance policy proceeds you've received are taxable.

How are annuities taxed?

Different types of annuities are subject to different tax treatments. Generally, you pay taxes on annuities only once you start receiving payments or withdrawing funds. For example, earnings from non-qualified annuities are taxed upon withdrawal, while the contributions from after-tax dollars are not taxed.

For more information, see: Is an Annuity a Good Investment? Tax Pros and Cons.

Annuities are complex, so it's a good idea to seek advice from a trusted professional if you need clarification on your tax exposure.

Long-term care insurance income

Payments received from long-term care insurance policies are usually not subject to tax.

If you receive reimbursements for medical expenses due to injury or illness under an accident and health insurance contract, these payments are generally considered nontaxable by the IRS.

Are disability benefits taxable?

Disability and worker's compensation payments are generally nontaxable.

• Supplemental Security Income payments are also tax-exempt.
• Disability compensation or pension payments from the Department of Veterans Affairs to U.S. Military veterans are tax-free, as well.

Municipal bond interest

Government-issued bond interest is mostly tax-exempt, but some municipal bond interest might be taxable at federal and state levels.

For example, U.S. Treasury securities are taxable at the federal level. Corporate bond interest is taxable at both the federal and state levels.

Some capital gains and losses

If your capital losses exceed your capital gains, you can claim up to $3,000 excess loss as a deduction from your income. The deduction amount is the lesser of $3,000 ($1,500 if married filing separately) or the total net loss on Schedule D of your Form 1040. The IRS allows you to carry the loss forward to later years under specific rules.

• If you meet certain criteria, you can avoid capital gains taxes on the first $250,000 (single filers) of your profits on the sale of your primary residence and up to $500,000 if married and filing jointly.
• For more information, see Capital Gains Tax Exclusion for Homeowners: What to Know.

Roth account income

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.

Is alimony and child support taxable?

If you receive alimony or maintenance payments as part of a separation or divorce agreement made on or after January 1, 2019, those payments aren't taxable.

On the other hand, if you are paying alimony under such an agreement, you can't deduct the payments from your income tax.

• State tax treatment of alimony might differ.
• Child support payments aren't subject to tax.

What about overtime and tips?

The so-called One Big Beautiful Bill (OBBB), signature tax cut legislation from Donald Trump's second term as president, offers some temporary relief for certain taxpayers when it comes to federal taxes on overtime pay and reported cash tip income.

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.

Under the OBBB, eligible workers can deduct up to $25,000 in reported tip income from their federal tax, starting this year, 2025. The deduction phases out for those earning more than $150,000 ($300,000 for joint filers) and is scheduled to expire after 2028.

For more information, see What's Happening With Taxes on Overtime Pay and New No Tax on Tips Bill Approved.

Which states have no income tax?

If you live in one of the nine states without personal income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — you won't be taxed on your earned income at the state level.

• Washington State has a capital gains tax.
• New Hampshire eliminated its interest and dividend income tax.

Additionally, while some portion of your Social Security payments 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.

Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

This article has been updated to clarify the lifetime estate and gift tax exemption and the tax exemption for life insurance policy loans.

Related

• Income Tax Brackets for 2025
• What's the Standard Deduction?
• Capital Gains Tax Rates: What You Need to Know