Exempt Income

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DEFINITION of 'Exempt Income'

Certain types or amounts of income not subject to federal income tax. Examples of exempt income include municipal bond income, which may also be exempt from state income taxes, a portion of retirement benefits, qualified Roth IRA distributions and academic scholarships. Also exempt are gifts of less than $10,000 and certain death benefits.

BREAKING DOWN 'Exempt Income'

The Internal Revenue Service (IRS) allows each individual to claim an annual personal exemption, along with an exemption for their spouse and any dependents. The personal exemption amount, although low, is set aside to allow for individuals to have a modicum of untaxed income to pay for basic sustenance items, such as food, clothing and shelter.

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