Tax Exemption
Definition
An amount of income that is not subject to taxation. Personal exemptions were eliminated by the Tax Cuts and Jobs Act of 2017 for tax years 2018–2025, but the concept still applies in other contexts. Certain types of income are exempt from tax, such as municipal bond interest, gifts below the annual exclusion amount ($18,000 in 2025), and some employer benefits like health insurance.
Example
Interest earned on municipal bonds issued by your state is typically exempt from both federal and state income tax.