What type of income is typically non-taxable according to IRS guidelines?

Interest from municipal bonds is typically classified as non-taxable income according to IRS guidelines. This is because many states and local governments issue municipal bonds to fund public projects, and the interest earned on these bonds is often exempt from federal income tax, and sometimes state and local taxes as well. This tax-exempt status serves as an incentive for investors to purchase these bonds, allowing governments to borrow at lower interest rates.

In contrast, the other types of income listed, such as income from employment, rental income, and unemployment compensation, are generally subject to taxation. Income from employment is considered earned income and is fully taxable. Rental income must also be reported as taxable income, with certain deductions available for related expenses. Unemployment compensation is included in gross income and is taxable as well. Therefore, municipal bond interest stands out as the primary example of income that is typically non-taxable under IRS guidelines.