Incomes IRS Can't Touch

Aug 29, 2022 By Triston Martin

As you're probably aware, most income sources are tax-deductible to the IRS. If you earn it in the form of a salary, hourly earnings, as well as commissions, tips, or rent from a home you lease or via dividends and interest from your investments or investments, Uncle Sam will be sure to take his fair portion. Barter earnings are also tax-deductible. Let's say you swap your services to cut hair for lawn cutting services. It seems like a fair trade, right? As per the IRS, the taxpayer must be taxed on fair value for her services. What happens if you decide to commit a crime that is unsavory and steal funds from your employer or book club? You're probably surprised to learn this income is tax-deductible. The IRS specifically states that the proceeds of embezzlement and kickbacks can be tax-deductible.

Veterans' Benefits

Benefits provided to family members of veterans are not tax-deductible. This includes:

  • Training, education, and subsistence allowances
  • Pension and disability compensation for people with disabilities
  • Homes that are designed to accommodate people with disabilities.
  • Motor vehicle grants for veterans who lose sight or their limbs
  • Insurance proceeds and dividends are paid directly to veteran veterans or their beneficiaries
  • The interest on dividends from insurance is left in the account of the Veterans Administration
  • Benefits of a dependent-care assistance program
  • The death benefit is paid to survivors of an active Armed Forces soldier who died after September 10, 2001.
  • The payments are made through the compensated work therapy program.
  • Any bonus paid by a political or state subdivision for the service in a conflict zone

Workers' Compensation

If you receive workers' compensation due to a work-related injury or illness, it is tax-free if the payment is made under the workers' compensation law.

Foster Care Payments

If you're a foster child receiving payments for foster care from an agency for child placement or the local or state government, the income is not tax-deductible.

Casualty Insurance

If you've got an insurance claim due to an automobile accident or house fire, the casualty insurance payouts are tax-free unless they exceed the amount of your actual loss.


If you get an inheritance from the estate of a deceased relative, a friend, or perhaps even an acquaintance, you aren't required to pay federal tax on the inheritance. This is because an estate the decedent has left is responsible for the entire tax, which is due before you get the inheritance. The estate tax is based on the amount of the estate taxed. Some states do impose state taxes on inheritances, so check.

Disaster Relief Grants

The revenue is tax-free if you receive the post-disaster relief grants and then use the funds to cover your costs or requirements to pay for dental, medical housing or transport, personal possessions, and funeral costs.

Interest on Municipal Bonds

Municipal bonds issued by cities, states, counties, states, and other government agencies to finance their activities are not subject to federal income taxes. These bonds may even be exempted from local and state taxes, based on whether you live in the state where they were issued, which makes them double- or possibly "triple-exempt."

Gambling Income

Gambling earnings are tax-free only if the losses exceed your total winnings during your tax year. If you're on the other side, your gambling profits exceed your losses, then that income is tax-deductible. You are required to be able to report on separate tax returns that your winnings are income. Additionally, you can deduct losses up to that amount if you itemize your deductions under "other itemized deductions."


If you receive a cash gift from a family member or friend, you are not required to pay taxes on this income. If the gift is greater than $15,000 in 2020 and 2021, then the person who gave it could be liable for gift tax; however, you don't.

Life Insurance Death Benefits

Generally, when the beneficiary of an insurance policy pays this death reward, the money is not considered taxable income, and the beneficiary isn't required to pay tax on the amount.

Welfare Benefits

Social assistance payments, like those offered through SNAP and TANF, cannot be taxed under the IRS.


It is not always apparent that the IRS can make a dent in any income you earn; there are some exceptions to the rule; before you conclude that any income is tax-deductible or not, check with an accountant or tax expert and visit the IRS website.

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