651 / What items are included in gross income? What items are excluded from gross income?

Some of the specifically excluded items from gross income that are received tax-free by an individual taxpayer are: gifts and inheritances;² gain (subject to limitation) from the sale of a personal residence (see Q ); at least 50 percent of gain (subject to limitation) from the sale of certain qualified small business stock held for more than five years (see Q and Q ); interest on certain state, city or other political subdivision bonds (see Q ); Social Security and railroad retirement benefits (subject to limitations – see Q ); veterans’ benefits in any form specifically covering personal injuries or sickness from active service in the armed forces (but not including retirement pay);³ Workers’ Compensation Act payments (subject to limitation);⁴ death proceeds of life insurance;⁵ amounts paid or expenses incurred by an employer for qualified adoption expenses in connection with the adoption of a child by an employee if the amounts are furnished pursuant to an adoption assistance program;⁶ contributions to a “Medicare Advantage MSA” by the Department of Health and Human Services;⁷ exempt-interest dividends from mutual funds (see Q ); interest on certain U.S. savings bonds purchased after 1989 and used to pay higher education expenses (within limits – see Q );⁸ contributions paid by an employer to Health Savings Accounts;⁹ distributions from Health Savings Accounts used to pay qualified medical expenses;¹⁰ and federal subsidies for prescription drug plans.¹¹

1.  IRC § 61(a).

2.  IRC § 102.