What do you call income that is exempt from federal income tax?

Nontaxable income refers to income that is not subject to federal income tax under the Internal Revenue Code. This type of income can include a variety of sources such as certain gifts, inheritances, life insurance proceeds, and specific types of interest income like municipal bond interest. Understanding the concept of nontaxable income is crucial for tax preparation and planning because it impacts the total income reported on tax returns and influences the tax liabilities.

The term clearly communicates the nature of the income, indicating that it is not intended to be taxed by the federal government. This is important for both individuals and tax professionals to correctly categorize income for accurate tax filing. Recognizing and properly reporting nontaxable income helps in ensuring compliance with tax laws while potentially reducing the overall tax burden.