You will owe federal taxes, and possibly state taxes as well, on most of your income. However, there are certain sources of income that are exempt from taxation. It’s important to note that there are nine states that do not tax income.
Here are eight types of income that are not subject to federal taxes:
1. Child support: Child support payments received are not considered taxable income and should not be included when filing your taxes. On the other hand, if you are making child support payments, they are not deductible on your tax return.
2. Disaster relief assistance: If you receive assistance payments or compensation for a disaster and meet the eligibility criteria, the money you receive is usually not taxable. However, the relief must adhere to FEMA’s individual assistance eligibility rules and be approved by the IRS for tax relief.
3. Financial gifts: Cash or assets received as gifts from friends or family are generally tax-free for the recipient. However, the giver may need to file a gift tax return for large gifts exceeding $19,000 per recipient in 2025.
4. Inheritance: Inheritances do not incur federal estate tax, as the estate of the deceased individual is responsible for any federal or state estate taxes. While there is no federal inheritance tax, some states impose an inheritance tax, such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
5. Interest on municipal bonds: Interest income from municipal bonds issued by the federal government or state entities is typically not taxable at the federal level. However, you may be subject to capital gains taxes when selling the bond.
6. Life insurance death benefits: Proceeds from a life insurance policy received as a beneficiary are generally not taxable income. Any interest earned on the proceeds may be subject to taxation.
7. Profit from home sale: If you sell your home for a profit, you may qualify for a tax exemption of up to $250,000 for single filers or $500,000 for married couples filing jointly if certain conditions are met.
8. Roth IRA income: Withdrawals from Roth accounts, such as Roth IRAs, Roth 401(k)s, and Roth 403(b)s, are tax-free as long as they meet the required qualifications. Contributions to Roth IRAs can be withdrawn tax-free at any time since taxes were already paid on the contributions.
In order to avoid taxes on your investment earnings, it is important to follow the withdrawal rules, such as the Roth IRA 5-year rule.
