Tax-Free Income - Find Ways to Save on Taxes
"Little by little does the trick." -Aesop
Whether you work for a paycheck or collect Social Security benefits, there are many sources of income available to you that are completely tax-free. Little by little, they can add up to a lot more money in your pocket.
It's true! This page contains updated information about many forms of tax-free income available to the average taxpayer. And yes, this is all legal; tax law does not allow the IRS to tax the income and benefits discussed here.
Examples of Tax-Free Income
Examples of income which cannot be taxed:
Supplemental Security Income (SSI)
Accident and/or health Insurance benefits
Worker's Compensation (and FECA payments)
Disability Benefits or Disability Pension payments
Compensatory (but not punitive) damages awarded in court
Gifts up to a certain value
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
Medical Savings Account withdrawals
Life insurance benefits
Accelerated death benefits
Reimbursements for theft or casualty loss
Disaster relief grants
Up to $95,100 of foreign earned income (for 2012)
Please note that the above list is not definitive or all-inclusive. There are other forms of tax-free income available.
Are Social Security Benefits Tax-Free?
If Social Security is your only source of income, then it is generally tax-free. If you have other sources of income in addition to Social Security, some of your Social Security Benefits may be taxed.
Find out more about social security and taxes.
Tax-Free Income from Work
Here are several options for tax-free income which may be provided by your employer:
Your Employer Can Pay for Your Education
Your employer can provide 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.
Learn about more tax benefits for education.
Your Employer Can Pay for Public Transportation
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. Whether you take the bus, train, subway, monorail, ferry, or vanpool, up to $240 per month may be provided to you tax-free during 2012.
Your Employer Can Pay for Your Parking
If you drive to work and pay a fee for parking, your employer can reimburse you up to $240 per month in 2012, tax-free.
Your Employer Can Pay You to Ride a Bicycle to Work
If you primarily use a bicycle to commute to work, you may be reimbursed up to $20 a month, tax-free, for the cost of storage, maintenance, and repairs.
Tax-Free Carpool Income
With gas prices so high, it may be time to consider starting a carpool. As the operator of your own car, any money your passengers pay you for gas or expenses is tax-free 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 taxable income. Note that this particular form of tax-free income is paid to you by your passengers and not your employer.
Your Employer Can 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.
Your Employer Can Pay for 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.
Estimate Your Tax Return with Our FREE 2012 Tax Calculator