8 Types Of Non-Taxable Income

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It’s almost time for tax season. Everyone knows that your earned wages will be taxed by the IRS. What many people do not realize is that there are numerous sources of income that are not taxed by the federal government. If you can increase your income from these sources, then you will reduce your overall tax burden. But what are these sources and how can you take advantage of them. 

Here are eight sources of income that are not taxable under the federal tax code.

Interest Earned From Tax Exempt Municipal Bonds

As the name suggests, interest earned from tax exempt municipal bonds is not subject to federal taxes. In fact, many states also give state tax exemption if the bonds were issued in the state in which you file your taxes. This tax exemption applies to both individual tax exempt municipal bonds and to shares in tax exempt municipal bond funds.

Be aware that there are taxable municipal bonds that do not benefit from federal or state tax exemption. Make sure that you pay close attention to the tax status of any municipal bond or municipal bond fund that you purchase. (To learn more about municipal bonds, see An Investor’s Guide To Municipal Bonds.)

Income From The Sale Of Your Primary Residence

If you sell your primary residence for a profit and pass the IRS tests for home use and ownership, then a portion of your income for the sale will be tax exempt. To pass the tests, you need to prove that you have owned your home for at least two of the past five years. You also need to prove that it is your primacy place of residence.

If you can do this, then you can exclude up to $250,000 of capital gains from you taxable income. If you file jointly with your spouse, you can exclude up to $500,000. If you don’t meet the two year test, you may be able to get a partial tax exemption for the income earned from the sale.

Life Insurance Money

It is not pleasant to think about, but if a loved one dies and you are the beneficiary of their life insurance policy, you will generally not have to pay any taxes on the life insurance money that you receive. You should note that there are some exceptions to this rule. You should consult with the IRS or a tax specialist for further information about when life insurance disbarments can be taxed. (For more information about life insurance, see Life Insurance.)

Non-Taxable Gifts

A gift is exactly what it sounds like. According to the IRS, a gift is any transfer to an individual that the individual does not fully pay for. Some gifts are taxable. However, a good many are not. For example, in 2011, you can give a person up to $13,000 without any party being taxed. Other types of gifts that can qualify for tax exempt status include tuition or medical expenses that you pay on behalf of someone else, gifts to your spouse, and gifts to a political organization. You should speak with a tax expert before giving a gift to make sure that you take full advantage of the potential tax benefit. (To lean more, see The Rules Of The IRS Gift Tax.)

Employer Fringe Benefits

There are numerous fringe benefits that employers give to their employees. Some companies offer their employees subsidies for public transportation. This can include subway cards, bus passes or cab fares. Additionally, some companies also offer parking subsidies to their employees that drive to work. As long as these subsides are not valued more than $230, you can receive these subsidies tax free. Other tax free fringe benefits include free gym membership, use of a company car and employee discounts. 

Child Support

If you are the parent with custody of the child, you do not have to report child support payments to the IRS. You should note that spousal support is not necessarily tax exempt.

Foster Care Payments

If you take care of foster children, you will receive payments from the state to help with expenses. Since these payments are made by a state agency or tax-exempt organization, you do not have to report them to the IRS.

Personal Injury Awards

If you have been issued financial awards because of a personal injury suit, you might not have to pay taxes on the money awarded. You should speak with a tax professional to determine whether you need to report the funds you received from a personal injury suit.

When tax season rolls around, many people focus on the financial items that they are required to report. However, we could all benefit from taking a closer look at the income that we don’t need to report. If you can take advantage of these sources of tax free income, you will be able to save money during tax time.

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Last Updated: January 16, 2012
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About Michael Diaz Michael Diaz is a contributing author for CanDoFinance.com.

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