Tax-exempt income is income from any source which the Federal, state, or local government does not include when implementing its income tax. Individuals and organizations may have to report this income on a tax return, but the income will not be considered when determining their tax liability. Examples of tax exempt income include employer sponsored health insurance and Social Security benefits. Income tax does not include some forms of income like inheritances and gifts because they have their own tax systems that apply.
[Last updated in October of 2021 by the Wex Definitions Team]