PM 08-03-02-a: MAGI Exempt Unearned Income

new textThe following Unearned Income Types are exempt under MAGI Budgeting.

Income Type Description
Adoption /Foster Care Subsidies Any adoption subsidy payment or foster care payment received from DCFS or from a child welfare agency of another state. 
American Indian and Alaska Native (AI/AN) Income Excluded by Federal Law The following AI/AN income are excluded:
  1. Distributions from Alaska Native Corporations and Settlement Trusts
  2. Distributions from any property held in trust, subject to Federal restrictions, located within the most recent boundaries of a prior Federal reservation, or otherwise under the supervision of the Secretary of the Interior
  3. Distributions and payments from rents, leases, rights of way, royalties, usage rights, or natural resource extraction and harvest from-
    1. Rights of ownership or possession in any lands described in paragraph (2) above, or
    2. Federally protected rights regarding off-reservation hunting, fishing, gathering, or usage of natural resources
  4. Distributions resulting from real property ownership interests related to natural resources and improvements-
    1. Located on or near a reservation or within the most recent boundaries of a prior Federal reservation, or
    2. Resulting from the exercise of federally-protected rights relating to such real property ownership interests
  5. Payments resulting from ownership interests in or usage rights to items that have unique religious, spiritual, traditional, or cultural significance or rights that support subsistence or a traditional lifestyle according to applicable Tribal Law or custom
  6. Student financial assistance provided under the Bureau of Indian Affairs education programs
Child Support Payments Child support (or child maintenance) is an ongoing, periodic payment made by a parent for the financial benefit of a child.
Contributions, Gifts and Inheritances
  • Contributions and gifts are money received that is not payment for goods and services provided by the person, and is not paid because of a debt owed to the person.
  • Inheritance is cash, a right, or a non-cash item bequeathed to a person as a result of someone's death.
Education Benefits (used for education purposes) Portion of scholarships, awards or fellowship grants used for educational purposes only
Jury Duty The amount of the payment that is turned over to an employer, because the employer pays the person's salary while on jury duty, is exempt.
Life Insurance Accelerated Benefits Accelerated benefits paid under a life insurance policy that are paid before the insured person's death due to the person's terminal illness.

Borrower: Monies received by the borrower that must be paid back to the lender are loans. Loans are exempt because they have to be repaid. This includes student loans and cash advances from a credit card that must be paid back.

  • Note: Loans that are forgiven or canceled are non-exempt income. However, it is exempt when the loan was a student loan that provided that all or part of the debt would be canceled if the student works for a designated period of time in certain professions.

Lender: The part of payment received toward the principal of the loan is exempt. Interest paid on the loan is counted as unearned income.

Personal Injury Settlement

Compensation for Physical Injury is Generally Exempt

Federal tax law excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer's gross income.

Exceptions to the General Rule

  • Any portion of the settlement that is for medical expenses that were itemized in a prior tax year where the deduction provided a tax benefit. 
  • Damages relating to a breach of contract if it is the breach of contract that caused the injury, and the breach of contract is the basis of the lawsuit.
  • Punitive damages; if awarded, the verdict will show separate amounts for punitive versus compensatory damages.
  • Interest on the judgment. 
  • Claims for emotional distress only, that are unrelated to a physical injury.
Reverse Mortgages Reverse mortgages must be repaid and are considered as a loan. A reverse mortgage may be paid as a lump sum, a monthly advance, a line of credit, or a combination of all three.
Supplemental Security Income (SSI) Need-based payments issued by the Social Security Administration to persons who are aged, blind or have a disability who meet certain income and resource eligibility requirements.
Veteran's Benefits Benefits paid under any law, regulation or administrative practice administered by the Department of Veterans Affairs (VA) to veterans, their spouses, their dependents or  survivors. Veterans' benefits include a wide range of financial, educational, medical, and other benefits.
Worker's Compensation

Income received due to an occupational sickness or injury if paid under a workers' compensation act or a statute in the nature of a workers' compensation act.

Note: If a disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities (such as a Firefighter or Police Officer 'Line of Duty' pension) it may be exempt as workers' compensation. The rest of the pension, based on years of service, is not exempt.