Determining Tax-Exempt Income

There are several types of income that are not taxed by the IRS. However, you need to be careful when the determining what is taxable and what isn't.


This page:

  • Lists the most common types of tax-exempt income

  • Provides further information about non-taxable scholarships

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Reporting non-taxable income

some income that you receive during the year if considered to be tax-exempt, because of the nature and source of the income. The most common types of tax-exempt income are:

  • Welfare benefits
  • Interest from municipal bonds
  • Most gifts
  • Most inheritance and bequests
  • Workers compensation
  • Veteran's benefits
  • Federal tax refunds
  • Some scholarships/fellowships

In most cases, you don't have to include any money you receive from these sources in your total income or in any other income section, with the possible exception of municipal bond interest.

However, a good general rule to follow is that if you are unsure whether your income is taxable or not, it probably is. You can consult IRS publications for further information, or use an online preparation program with help built in.

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Non-taxable scholarships and fellowships

Scholarships are sometimes considered taxable and other times not. A good indicator is whether or not you receive a W2 form for your scholarship income.

If you do, then it is taxable and should be entered with wages and salaries.

However, not getting a W2 form for scholarship income does not mean it is non-taxable. If you do not receive a W2 form for your scholarship income and you are not pursuing a degree, the full amount is still taxable and should be included with your wage and salary amount.

If you are a degree candidate and do not receive a W2 form for your scholarship or fellowship, the amount applied to your tuition, fees, or school related supplies is fully excludable from taxation. Any scholarship designated for room and board is taxable and should be added to any wage or salary amount.

Related IRS publications

You can get more information about tax-exempt income directly from the IRS, in the form of Publication 525.

Note: you will need an Adobe Acrobat Reader to view these publications, which you can get here. (But you probably already have it.)