Certain types of income are not taxable. These exclusions reduce gross income without requiring deductions. Many exclusions apply only when specific statutory conditions are met.
Major Income Exclusions
Municipal bond interest
Interest from state and local government bonds issued for public purposes is generally excluded.
Gain on sale of main home
A taxpayer may exclude up to:
- $250,000 (single)
- $500,000 (MFJ)
Subject to ownership and use tests.
Discharge of Indebtedness (COD) Exclusions
Bankruptcy
Debt canceled in a Title 11 bankruptcy case is excluded.
Insolvency
Excluded to the extent liabilities exceed assets immediately before cancellation.
Student loan discharge
Excluded when:
- Canceled due to required service
- Canceled due to death or total permanent disability
- Canceled under ARPA provisions (through 2025)
Qualified principal residence debt
Up to $750,000 ($375,000 MFS) of acquisition/improvement debt discharged through 2025.
Qualified real property business debt
Applies to certain business real estate.
Qualified farm debt
Requires >50% of gross receipts from farming for prior 3 years.
Seller price reduction
Treated as a basis reduction, not income.
Social Security benefits
At least 15% of benefits is always excluded.
Employee‑Related Exclusions
Employee achievement awards
Up to $1,600 for qualified safety or service awards.
Fringe benefits
Includes many employer‑provided benefits specifically excluded by statute.
Clergy housing allowance
Reasonable housing allowance may be excluded.
Government‑Related Exclusions
- Military/government disability pensions — must not be based on years of service
- VA benefits — fully excluded
- Workers’ compensation — for job‑related injury or sickness
Gifts, Inheritances, and Insurance
Gifts and inheritances
Property received as a gift, bequest, or inheritance is excluded.
Life insurance proceeds
Death benefits are generally tax‑free.
Accelerated death benefits
Excluded for terminally or chronically ill individuals.
Casualty insurance
Excluded to the extent payments compensate for property damage.
Education‑Related Exclusions
- Scholarships and fellowships — excluded when used for qualified education expenses
- Coverdell ESA and 529 distributions — excluded when used for qualified education
- Savings bond interest — Series EE/I bonds used for higher education
Health and Injury Exclusions
- Medical reimbursements — excluded if taxpayer paid the premiums
- Compensatory damages for physical injury — excluded
- Qualified disaster relief payments — excluded for federally declared disasters
Family‑Related Exclusions
- Child support — always excluded
- Foster care payments — generally excluded
- Property transfers incident to divorce — no gain recognized
Employment‑Related Reimbursements
Accountable plan reimbursements
Excluded when:
- Expenses are ordinary and necessary
- Substantiated
- Excess amounts returned
Foreign Earned Income
Foreign earned income exclusion
A qualifying individual may exclude foreign wages up to the annual exclusion amount (adjusted annually). Each spouse may claim the exclusion separately if both qualify.