Income exclusion rule

The income exclusion rule specifies that certain types of income are not to be included in a taxpayer's reported gross income for the purpose of calculating income tax. The types of income that can be excluded from reportable income include the following:

  • Annuity and pension payments that constitute returns of capital
  • Child support payments
  • Interest earned on municipal securities
  • Life insurance proceeds
  • Welfare payments

With the exception of the interest earned on municipal securities, there is no limit on the types of income that fall within this rule. The interest on municipal securities is added back to the gross income figure in order to calculate alternative minimum tax.

This rule is promulgated by the Internal Revenue Service.