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.