Which type of income is exempt from federal taxes?

Inheritance is generally exempt from federal income taxes, making it the correct choice in this context. Under current tax law, individuals do not pay federal income tax on money or property received as an inheritance. This means that when someone inherits assets, such as cash, real estate, or other valuables, those assets are not subject to immediate taxation at the federal level. However, it is important to note that some states may impose estate or inheritance taxes, but this does not affect the exemption from federal income tax.

Tip income, alimony, and IRA distributions are all subject to taxation under federal law. Tip income is considered wage income and must be reported on tax returns. Alimony received is also taxable income for the recipient, and IRA distributions typically count as taxable income unless certain conditions, such as qualifying for tax-free Roth distributions, apply. Thus, the unique nature of inherited assets makes them exempt from federal income taxes.