The Carr Report: The IRS can’t touch this income!

As I was thinking of a title for this article, MC Hammer’s “U Can’t Touch This” song started playing in my head. So I ran with it. The IRS is known for taxing all sources of income and all profits made from the sale of all consumer goods and services including profits made from the sale of stolen goods. You read that correctly! Tax laws require individuals to report all income, regardless of its source, including income obtained through illegal means.

In this article, I wanted to delve into a few income sources and benefits the IRS can’t touch. I use the expression “can’t touch” loosely because the IRS can update tax laws at any given time, making non-taxable income taxable. Below I’ve isolated various incomes that fall outside the tax purview of the IRS. Understanding these exceptions is crucial for individuals navigating the complex landscape of taxation. Here we delve into the intricacies of income that the IRS doesn’t tax.

Certain Social Security Benefits:  Depending on your income level and filing status, a portion of your social security benefits may be tax-free. Generally, if social security benefits are your only source of income, they are not subject to federal income tax. However, if you have other substantial income in addition to social security, a portion of your benefits may be taxable.

Child Support Payments: In the eyes of the IRS, child support payments are considered non-taxable income for both the recipient (the custodial parent) and the payer (the non-custodial parent). This means that the parent receiving child support does not have to report these payments as income, and the parent making the payments cannot claim a deduction for child support on their tax return.

Life Insurance Payouts: Proceeds from a life insurance policy received upon the death of the insured are typically not considered taxable income. These payouts are intended to provide financial support to beneficiaries and are therefore excluded from income tax.

Scholarships and Grants:  Scholarships and grants used for qualified education expenses, such as tuition, fees, books, and supplies, are generally tax-free. However, amounts used for room and board or other non-qualified expenses may be taxable.

Healthcare Insurance Benefits: Employer-provided healthcare benefits, such as health insurance and medical reimbursements, are often untaxed. These benefits aim to promote the well-being of employees and their families without adding to their taxable income.

Qualified Roth IRA Distributions: Qualified distributions from Roth Individual Retirement Accounts (IRAs) are another form of income that is not taxed by the IRS. Unlike traditional IRAs, contributions to Roth IRAs are made with after-tax dollars, so withdrawals of both contributions and earnings are generally tax-free if certain conditions are met, such as the account being open for at least five years and the account holder being over 59-1/2 years old.

Municipal Bond Interest:  Interest income earned from municipal bonds issued by state or local governments is generally exempt from federal income tax. This exemption aims to encourage investment in public projects such as infrastructure, schools, and hospitals.

Gifts and Inheritances: One of the most common forms of non-taxable income is gifts and inheritances. The IRS generally does not tax gifts received from individuals, as long as they are below certain limits. In 2024, the annual gift exclusion amount is $16,000 per person, meaning that gifts below this threshold are not subject to gift tax. Similarly, inheritances received from estates are typically not taxed as income to the beneficiary.

Alimony Payments: For divorce or separation agreements executed after December 31, 2018, alimony payments are no longer deductible by the payor, and recipients do not need to include them as taxable income on their tax returns. This change applies to both new divorce or separation agreements and modifications to existing agreements made after December 31, 2018. For agreements finalized before December 31, 2018, the old rules still apply, meaning alimony payments are deductible by the payor and taxable to the recipient.

Profit From Sale of Primary Residence: In most cases, the profit from the sale of a primary residence is not taxable, thanks to the capital gains exclusion provided by the Internal Revenue Service (IRS). The IRS allows individuals to exclude up to a certain amount of capital gains from the sale of their primary residence from their taxable income. The current capital gains exclusion for the sale of a primary residence is $250,000 for single filers and $500,000 for married couples filing jointly. To qualify for this exclusion, homeowners must meet certain ownership and use requirements:

  1. Ownership: The homeowner must have owned the home for at least two of the five years leading up to the sale date.
  2. Use: The homeowner must have used the home as their primary residence for at least two of the five years leading up to the sale date.

Qualified Disaster Relief Payments: Certain disaster relief payments received from government agencies or charitable organizations to cover necessary expenses resulting from a qualified disaster are typically tax-free. This includes payments for temporary housing, medical expenses, and repair or replacement of damaged property.

Worker’s Compensation Benefits: Payments received under worker’s compensation laws for job-related injuries or illnesses are generally exempt from federal income tax. These benefits aim to provide financial assistance to injured workers during their recovery period.

Veterans’ Benefits: Various benefits provided to veterans, including disability compensation, pensions, and education assistance, are generally not subject to federal income tax. These benefits recognize and support the sacrifices made by veterans in service to their country.

Long-term Care Insurance: Long-term care insurance benefits are typically not taxable as long as they meet certain criteria set by the IRS. Generally, benefits received from a qualified long-term care insurance policy are not considered taxable income. To be considered tax-free, long-term care insurance benefits must be paid as reimbursement for qualified long-term care expenses. These expenses typically include costs associated with necessary medical, personal, and custodial care services provided to individuals who are chronically ill or unable to perform activities of daily living independently.

(Money Coach Damon Carr can be reached at 412-216-1013 or visit his website @



About Post Author


From the Web

Skip to content