Tax-Free Income

Here are eFile insider tax tips on designating your income as tax-exempt. And yes, this is legal: The law does not allow the IRS to collect taxes on the following income options.

Examples of Nontaxable Income

The following items are some examples of income which cannot be taxed:

• The first $2,400 of Unemployment Compensation (for Tax Year 2009)
• Welfare Benefits
• Supplemental Security Income (SSI)
• Accident and/or Health Insurance benefits
• Worker's Compensation (and FECA payments)
• Disability Benefits or Disability Pension payments
• Child Support
• Compensatory (but not Punitive) Damages awarded in court
• Gifts and inheritances (under current tax law)
• Dealer/manufacturer cash rebates
• Meals and lodging when required by your job
• Long-term Care Insurance payments
• Qualified scholarships and grants
• Credit card rewards
• Frequent-flyer miles
• Qualified canceled mortgage debt
• Military Allowances
• Veterans' Benefits
• Medical Savings Account withdrawals
• COBRA premium subsidies
• Life Insurance benefits (paid to you from another's policy)
• Accelerated death benefits
• Reimbursements for theft or casualty loss
• Disaster relief grants
• Up to $80,000 of foreign earned income (for US citizens living abroad)

Please note that the above list is not definitive or all-inclusive.

Looking for a pay raise but not more taxes?

Here are several options for non-taxable earned income you might want to review with your employer:

Educate yourself

Your company can deduct up to $5,250 per year in educational aid when you take undergraduate or graduate courses. Best of all, the school courses don't have to be job-related (your employer might not like it, but the IRS does not care). This is essentially a tax-free pay raise.

Take public transportation to work

With gas prices so high, have you considered using public transportation to get to work ... and saving while doing it?

Your employer can purchase public transportation fare tickets, passes, or tokens for you to get to and from work. Up to $120 per month may be provided to you with no tax liability. 

Let your employer pay for your parking

If you drive to work and pay a parking fee, your employer can reimburse you up to $230 per month, tax free. 

Ride a bicycle to work

If you use a bicycle to commute to work, you may be reimbursed for the purchase price of the bicycle, as well as the costs of storage, maintenance, and repairs.

You may also be reimbursed $20 per month for any month in which you rode your bicycle to work a substantial portion of the time.

Let your employer pay your health insurance premiums

If you are not insured through your employer and your HMO insurance premium is $3,360, or $280 a month, your actual cost is much more than that. For this premium, the real cost would be $4,480 (Premium: $3,360 plus $1,120 income tax) per year (25% tax bracket).

If you are insured through your employer, both of you will achieve the same benefit. Your income increases and the employer pays less in salary, since the insurance payments are fully deductible. In addition, the payroll taxes on insurance premiums do not apply.

Term life insurance

Your employer can pay your premiums for term life insurance coverage of up to $50,000. You, the employee, can select a beneficiary of your choice. The employer can deduct the expense and you will have additional tax-free income.

Other tax-saving tips

Earn interest money tax-free:

Did you know that if you earn interest on certain municipal state type bonds, you don't have to pay state income tax, and are sometimes exempt from federal income tax as well? These types of bonds are called Municipal Bonds, and their tax benefits increase with your marginal tax rate. If you are in the 35% income tax bracket, a 5% tax-free rate will give you a taxable rate of 7.69%.

A 15% tax bracket provides a taxable equivalent of only 5.88%. Please check here to learn more: investinginbonds.com. Note: You might find that some bonds are both state and federal tax-free.

High gas prices and carpools:

With gas prices at historic highs, it may be time to consider starting a carpool. As the operator of your own car, any money paid to you by your passengers is not viewed as income. Generally, if you travel alone you cannot deduct commuting expenses like gas. However, reimbursements from your carpoolers which are used to cover gas, repairs, and other car operating costs are not considered income.