10 Sources of Tax-Free Income

What Everyone Should Know

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 tax-free at the federal level. 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. Health insurance premiums are tax-free. There is constant talk about changing this, but for now this benefit can be paid in pre-tax dollars for most people.
• Income from Roth IRA and Roth 401(k) accounts. While the amounts contributed to these retirement savings accounts is taxed, any future earnings made on these contributions is tax-free at the federal level as long as the holding period and distribution rules are followed.
• Health 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 federally 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.
• Tax-free tips. Beginning in 2025 and going through 2028, up to $25,000 of your tip income (single or married filing joint) can be excluded from income. While the deduction cannot exceed your reported income, it phases out at a generous $150,000 ($300,000 joint). But you better be prepared to prove it with a proper W-2, 1099, or Form 4137.
• Tax-free overtime. Also running from 2025 through 2028, up to $12,500 ($25,000 for joint filers) of the overtime portion of your pay is not taxed. It is available with the same income phaseouts as noted within tax-free tips.
• 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 most airline miles earned on business credit card expenses, certain employee-provided tuition expenses, qualified adoption expense reimbursements, up to $50,000 in employer-paid term life insurance, flexible spending accounts for dependent care and health care, and commuting expense benefits for parking and mass transit commuting.