Income the IRS Can’t Touch

Wouldn’t it be nice to have a source of nontaxable income? You may be more fortunate than you realize. Listed here are a number of income items that the IRS does not tax.

Tax-Free Interest. 

Municipal bond interest is federal tax-free. This includes bonds issued by a state or municipality. The tax-free benefit increases the higher your income, but caution must be taken to ensure the underlying municipality is not in dire financial condition.

Health Insurance Premiums.

 For now, health insurance premiums are tax-free. This is scheduled to change in the future to help pay for health care reform, but for now this benefit can be paid in pre-tax dollars.

Income from Roth IRA and Roth 401(k) Accounts. 

While the amounts contributed to these retirement savings accounts is taxed, any earnings made on these contributions is federal tax-free as long as holding period and distribution rules are followed.

Health Related Spending Accounts (HSA).

Contributions and earnings in these health related spending accounts are tax-free as long as the proceeds in the account are used to pay for qualified health care expenses.

Child Support Received. 

Unlike alimony received, child support income is federal tax-free.

Car Pool Revenue. 

While commuting expenses are not generally deductible, any reimbursement of your commuting expenses by fellow passengers is not reportable as income.

Home Sale Gains. 

Up to $250,000 ($500,000 for married filing jointly) of capital gains on a sale of your principal residence can be tax-free.

Certain Employer Compensation.

 In addition to health care premiums there are a number of employee benefits that are not taxable. All have limits, but every tax-free dollar is money in your pocket. These include:

  • Airline miles earned on business credit card expenses
  • Certain employee provided tuition expenses
  • Qualified adoption expense reimbursement
  • Up to $50,000 in employer paid term life insurance
  • Flex spending accounts for dependent care and health care
  • Commuting expense benefits for parking and mass transit commuting

Remember any time you can pay for something in pre-tax dollars is like giving yourself a raise. Are you taking advantage of all your federal tax-free income opportunities?

Now that you know what part of your income can’t be taxed, let’s take a look at how to organize your tax records.