Save Money With Tax-Protected Income

One of the keys to saving money on income taxes is knowing what types of income are protected by law from the IRS. There are six main kinds of income the federal law protects from itself, income that cannot be taxed, that is yours alone. Figure out how to earn as much as possible along these six profitable channels, and you will be a rich man or woman.

The most obvious source of nontaxable income is through interest on state or government bonds. Any interest from bonds that you buy from the federal government, from a state, from a county, or from a city, is not subject federal tax. The interest from some kinds of bonds may not even be subject to state tax.Thus, if you are in a high tax bracket, these bonds are particularly valuable. The money from interest in government or municipal bonds that you don’t have to give back in taxes makes their effective interest rate higher and higher, the higher your income tax bracket.

A lesser-known source of nontaxable income comes from carpooling. If you set up an arrangement where you drive your friends to work, and they pay for your gas and car repairs, you can deduct this income from your taxes. Otherwise, the income you spend on gas and the upkeep of your car gets taxed. For example, if you spend $100 a month on gas and repairs for your car, be prepared to pay an additional $33 per month in taxes. On the other hand, if you carpool, you can get your friends to give you just $100 a month total in exchange for rides - that money won’t be taxed.

Additionally, since 1997, the law allowed people to exclude up to $250,000 worth of income from selling their houses. Only two rules: the house has to have been your “principal residence” for at least two of the five years before you sell it, and the sale has to be “necessary,” i.e. mandated by one’s health, one’s employer, or some other immediate need.

One very useful source of tax-free “income” is through employers’ health benefits packages. For example, say the company your work for takes $3,000 out of your yearly salary of $50,000 in order pays $3,000 a year of health insurance for you and your family. That is essentially $3,000 of tax-deductible income. If the company had paid you the full $50,000 and no health insurance, you would be taxed for the full $50,000 - and then would have had to buy the $3,000 of health insurance yourself with the money left over. However, if the company pays you only $47,000 plus health insurance, you pay fewer taxes, because you’re only taxed for $47,000. Then, you and your family get the $3,000 in health insurance anyway.

Another great source of tax-free income is life insurance from your employer. This works the same way: your company pays for the life insurance, pays you less, and you get taxed less.

The same is true if you can get your employer to pay for your schooling. Companies get to deduct up to $5,250 from their taxes for helping to fund their employee’s college educations. They take the money out of your income, you pay fewer taxes, and you can go to school.

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