Exempt Income

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Tax Relief

    Any program or incentive that reduces the amount of tax owed ...
  2. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  3. Exemption Trust

    A trust whose purpose is to drastically reduce or eliminate federal ...
  4. Tax Credit

    An amount of money that a taxpayer is able to subtract from the ...
  5. Exemption

    A deduction allowed by law to reduce the amount of income that ...
  6. Taxable Income

    The amount of income that is used to calculate an individual's ...
RELATED FAQS
  1. How can a trust lower federal transfer tax liability?

    A trust is an arrangement in which an individual or entity controls property or funds on behalf of someone else without actually ... Read Full Answer >>
  2. How can I lower my effective tax rate without lowering my income?

    There are lots of ways to lower your effective tax rate, although your individual circumstances determine whether you can ... Read Full Answer >>
  3. Do I need to file an income tax return every year?

    Contrary to popular belief, there are indeed situations where a person does not need to file a tax return every year. For ... Read Full Answer >>
  4. Which states are the most expensive for high-income earners?

    The most expensive states for high-income earners are California, Hawaii and New York. The tax rates assessed by these states ... Read Full Answer >>
  5. How can I find out which income tax bracket I am in?

    U.S. federal tax brackets are based on filing status (single, married filing jointly, married filing separately or head of ... Read Full Answer >>
  6. Can a Limited Liability Company (LLC) issue stock?

    A limited liability company, or LLC, cannot issue stock. Instead, an LLC is structured to have single or multiple owners ... Read Full Answer >>
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Retirement

    Avoiding Too Much Tax On Your Distributions

    IRA assets can't be taxed twice - find out how to avoid paying the second time around.
  3. Taxes

    Tax Deductions On Mortgage Interest

    If you're a homeowner, this is one item you want to understand and use on your return.
  4. Options & Futures

    Getting Started On Your Estate Plan

    With some preparation, you can save your heirs from paying a hefty estate tax. Here are some tips.
  5. Taxes

    Weighing The Tax Benefits Of Municipal Securities

    Find out how to determine whether the tax exemption offered by "munis" benefits you.
  6. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  7. Professionals

    Help Parents Avoid This Retirement Savings Blunder

    Parents should make saving for their own retirement a priority over helping with their children’s college costs.
  8. Investing

    Financial Gifts For Grads: Kindergarten To College

    If you really want to help your grad preparing for the future, consider a present that supports their long-term goals—an early start to financial planning.
  9. Taxes

    Top Tax Issues For High-Net-Worth Individuals

    Wealth brings benefits, but from a tax perspective it creates special challenges. Here are some tax issues to pay attention to.
  10. Professionals

    5 Signs That You Have a Lousy 401(k) Plan

    Knowing whether a 401(k) plan is good or not so good is important. This will help participants decide how much to invest and when to demand improvements.

You May Also Like

Hot Definitions
  1. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  2. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  3. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  4. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
Trading Center