A more thorough explanation:

Definition: Exclusion refers to an item of income that is not included in the calculation of gross income for tax purposes. This means that the excluded income is not subject to taxation.

Example: One common example of an exclusion is the exclusion of interest earned on municipal bonds. This type of income is not subject to federal income tax, and in some cases, it may also be exempt from state and local taxes.

Explanation: The exclusion of certain types of income from gross income is a way to encourage certain behaviors or to provide relief to taxpayers who may be facing financial hardship. In the case of municipal bond interest, the exclusion is intended to encourage investment in local infrastructure projects. By excluding this income from taxation, investors are more likely to invest in these types of bonds, which can help fund important public projects.