Nontaxable Income: What 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.

1. Tax-free interest. The federal government does not tax municipal bond interest. 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.
2. Health insurance premiums. For now, most health insurance premiums are tax free. This could change in the future to help pay for health care reform, but for most this benefit can be paid in pre-tax dollars.
3. Income from Roth IRA and Roth 401(k) accounts. While the amounts contributed into these retirement savings accounts are taxed, any earnings made on the contributions are federal tax free as long as holding period and distribution rules are followed.
4. Health savings accounts (HSA). Contributions and earnings in health related savings accounts are tax free as long as the proceeds in the account are used to pay for qualified health care expenses.
5. Child support received. Unlike alimony you receive, child support income is free from federal tax.
6. Car pool revenue. While commuting expenses are not generally deductible, any reimbursement of your commuting expenses by fellow passengers is not reportable as income.
7. 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.
8. Up to 14 days of rental income. If you rent out your home or vacation property, up to 14 days of this rental income each year can be tax free.
9. 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:
   1. airline miles earned on business credit card expenses
   2. certain employee provided tuition expenses
   3. qualified adoption expense reimbursement
   4. up to $50,000 in employer-paid term life insurance
   5. flex spending accounts for dependent care and health care
   6. commuting expense benefits for parking and mass transit commuting

Remember when you pay for something in pre-tax dollars it's like giving yourself a raise. Because of this, be sure you take advantage of as many tax-free income opportunities as possible.