Table of Contents

Exempt Income: Definition, Examples, and Tax Rules

By

澳洲幸运5官方开奖结果体彩网:Julia Kagan

Updated March 11, 2025

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Lea D. Uradu

Fact checked by

Suzanne Kvilhaug

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Definition

Earnings not subject to income tax, whether federal or sta🦋te, are referrꦉed to as exempt income.

What Is Exempt Income?

Exempt income is income that's not subject to income tax. Some types of income are exempt from federal or state income tax, or both. The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) determines which types of incoꦏme are exempt from federal income tax and the circumstances for each exemption. States have their own rules that define what counts as exempt income.

Key Takeaways

Exempt income is not subject to taxation.
Some income may be exempt at the state level but taxed at the federal level.
Income from some types of investments, like municipal bonds, qualifies as exempt income.
Distributions from Roth 401(k)s and Roth individual retirement accounts (IRAs) are tax-exempt.
Income from certain benefits, such as employer-sponsored supplemental disability insurance and most benefits from employer-sponsored health insurance plans, are exempt from taxes.

Understanding Exempt Income

Some income and benefits are 澳洲幸运5官方开奖结果体彩网:nontaxable under certain circumstances. Several health-related benefits are 澳洲幸运5官方开奖结果体彩网:tax-exempt, including benefits from employer-sponsored supplemental disability insurance purchased with after-tax dollars, private insurance plans funded with after-tax dollars, most benefits from employer-sponsored health insurance plans, and 澳洲幸运5官方开奖结果体彩网:worker's compensation.

The 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act (TCJA) in 2017 eliminated personal exemptions from tax years 2018 to 2026 but roughly doubled the 澳洲幸运5官方开奖结果体彩网:standard deduction. For tax years 2024 and 2025, the standard deductions are:

2024 and 2025 Standard Deductions
	2025 Tax Year	2024 Tax Year
Single Taxpayers and Married Couples Filing Separately	$15,000	$14,600
Married Couples Filing Jointly	$30,000	$29,200
Heads of Household	$22,500	$21,900

Important

When you file your taxes, you can choose between taking the standard deduction or 澳洲幸运5官方开奖结果体彩网:itemizing your deductions. 澳洲幸运5官方开奖结果体彩网:Examples of itemized deductions include medical expenses, mortgage interest, and charitable🌸 donations.

Examples of Exempt Income

Distributions from health savings accounts (HSAs) are only exempt from income tax if they are used for qualified medical expenses. Qualified distributions from 澳洲幸运5官方开奖结果体彩网:Roth 401(k) plans and 澳洲幸运5官方开奖结果体彩网:Roth IRAs funded with after-tax dollars are tax-exempt.

Interest earned from 澳洲幸运5官方开奖结果体彩网:municipal bonds is exempt from federal and state income tax if you reside in the state where the bond was issued.

If someone dies and you are the 澳洲幸运5官方开奖结果体彩网:beneficiary of 澳洲幸运5官方开奖结果体彩网:a life insurance benefit, that is also nontaxable income.

What Does Exempt Mean?

"Exempt" means "free from." Tax exempt means free from taxes.

What Types of Income Are Tax Exempt?

Income from municipal bonds and distributions from Roth 401(k)s and Roth IRAs are tax-exempt.Income from employer-sponsored benefits—including supplemental disability insurance and most benefits from employer-sponsored health insurance plans—are exempt.

Is Unemployment Income Taxed?

Unemployment benefits are treated as 澳洲幸运5官方开奖结果体彩网:ordinary income by the federal government, but not all states tax unemployment income. Unemployment compensation is taxed based on the program paying the benefits.

The Bottom Line

Almost all forms of income are taxable, including wages, 澳洲幸运5官方开奖结果体彩网:salaries, and tips. But certain forms of income aren't taxable. Exempt income includes distributi♓ons from Roth retirement accounts, municipal bonds, and certain benefits.

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