Under federal tax guidelines, exempt income, meaning nontaxable, does not always mean you do not have to report it. The Internal Revenue Service considers income as money, property or services. The source of the income determines tax status and only a few types don't end up on income tax forms.
Video of the Day
Gifts, Inheritances, and Life Insurance
Income you get as the beneficiary of a life insurance policy is not taxable. Similarly, gifts passed down through a will, or an inheritance, are generally not reported as income. You must report property that earns interest or otherwise produces income.
The IRS does not consider child support payments income. However, it does expect you to report alimony payments. If you get both, separate the two and report only the portion mandated as alimony.
Workers' compensation benefits are tax-exempt. If a worker is temporarily off work due to a job-related injury or illness, benefits are nontaxable. However, if a worker retires due to a job-related injury or illness, part of the benefits may be taxable if it reduces the taxpayer's Social Security amount.
Some Bond Interest
You don't always have to report all of the accumulated interest on U.S. savings bonds. For example, if you inherit bonds, the interest you report from Form 1099-INT is just what you earned in the previous tax year. It doesn't reflect anything reported before by the decedent. In addition, earnings on U.S. savings bonds are exempt from all state and local taxes. Some state and municipal bonds earn tax-exempt interest. These amounts go on Line 8b of Form 1040.
Individual Retirement Accounts
Interest earned through a traditional individual retirement account isn't taxable income until you begin to take distributions. Earnings from a Roth IRA are not taxable income.
Scholarships and fellowships don't count as taxable income as long as the money is applied to tuition or course-required fees, books, and equipment. Any portion of it used to cover something else, like living expenses, is taxable. The IRS also expects you to report scholarship prizes from contests that aren't specifically for education expenses.