Income Exclusion Rule

DEFINITION of 'Income Exclusion Rule'

A rule that sets aside certain types of income as nontaxable. There are many types of income that qualify under this rule, such as life insurance death benefit proceeds, child support, welfare and municipal bond income. Income that is excluded is not reported anywhere on Form 1040.

BREAKING DOWN 'Income Exclusion Rule'

Generally, there is no limit to the amount of this type of income that can be received. One exception is municipal bond interest, which may be counted back as an alternative minimum tax preference item. Income that is excluded from taxation is generally accorded this status as a measure of relief for the recipient (or else as the result of powerful lobbying, as is the case with life insurance.)

RELATED TERMS
  1. Business Income

    Any income that is realized as a result of business activity. ...
  2. IRS Publication 525 - Taxable And ...

    A document published by the Internal Revenue Service (IRS) detailing ...
  3. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  4. Income Shifting

    A strategy of moving a person's income from a high income bracket ...
  5. Municipal Investment Trust

    A type of unit investment trust (UIT) that invests solely in ...
  6. Triple-Tax-Free

    An investment (usually a municipal bond) featuring interest payments ...
Related Articles
  1. Personal Finance

    10 Sources Of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
  2. Personal Finance

    Explaining Taxable Income

    Taxable income is the net of gross income and allowable deductions.
  3. Markets

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  4. Managing Wealth

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  5. Personal Finance

    How to Protect Your Income No Matter What

    What does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
  6. ETFs & Mutual Funds

    Consider These Municipal Bond ETFs

    Though relatively low-risk, there are still some factors to consider when taking the plunge into municipal bond ETFs.
  7. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
  8. Personal Finance

    Taxation Rules For Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  9. ETFs & Mutual Funds

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
  10. Retirement

    Why Own Life Insurance in a Qualified Retirement Plan?

    What are the pros and cons of owning cash value life insurance in a qualified retirement plan?
RELATED FAQS
  1. What does the IRS say about what constitutes taxable income?

    Find out what the Internal Revenue Service, or IRS, considers to be taxable income and nontaxable income, including value ... Read Answer >>
  2. Do I have to declare a $5,000 death benefit (life insurance policy) I received upon ...

    Is there a form I need to fill out? ... Read Answer >>
  3. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  4. What is the difference between gross income and earned income?

    Being able to distinguish between earned income and gross income is an important tool in preparing for and filing your individual ... Read Answer >>
  5. What is the difference in tax liability between gross income and other kinds of income?

    Find out how the U.S. government taxes worker's earnings, whether it is gross income or income exempted or excluded from ... Read Answer >>
  6. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
Trading Center