Most of the talk at tax time centers on what you have to report. Here are 25 types of income you don’t have to report. Use it as a checklist to help save taxes. Many of these items don’t just happen passively. You have to take steps to make them happen. (Figures are for 2000; Some may change for 2001.)
The first group of income that you can receive tax-free comes from your employer. If you are an employee, it pays to participate in these programs. If you are an employer, it pays to set them up.
1. Health and accident insurance. The premiums paid by your employer are tax-free.
2. Child care assistance. You can receive up to $5,000 worth in payments or services from your employer’s plan ($2,500 if you are married and file separate returns).
3. Reimbursements. If you pay for business travel and your employer reimburses you, you probably don’t have to report the reimbursement (but you also don’t get to deduct the expense). Ask your employer if its reimbursement policy qualifies.
4. Meals and lodging. If your employer provides meals and lodging on its own property, you may escape tax on the benefit.
5. Fringe benefits. These are mostly small things and may have some qualifications, quid-pro-quos and provisos. But they could add up, so check them out: public transit passes and parking, employee discounts, “no-additional-cost” services (such as standby flights for airline employees), small value items (such as minor use of the company copying machine), on-premises athletic facilities, and “working-condition” fringes (such as the use of the company car while on business).
6. Educational assistance. The limit is $5,250, and this one is tricky. Assistance for graduate-level work doesn’t count.
7. Long-term care insurance. Your employer may provide this as a tax-free benefit.
8. Adoption assistance. Employers may provide tax-free assistance of up to $5,000 per child ($6,000 if there are special needs).
Your private life
Here are some items that may affect you and your family.
9. Gifts received. But don’t try to call business payments gifts.
11. Child support. The children don’t have to report it and neither do you, if you have custody. But don’t confuse this with alimony.
12. Alimony. You have to negotiate the tax status of alimony with your ex-spouse. If the paying spouse gets to deduct the alimony, the recipient must report it as income. But you can arrange it so the paying spouse skips the deduction and the recipient excludes the income. This is relatively rare, but it’s possible.
13. Foster care payments. These are payments made by a state agency or tax-exempt organization for children placed in your home for qualified foster care.
14. Scholarships. This applies only to scholarships from accredited schools to degree candidates, and includes only tuition, fees, books, supplies and equipment. Grants for living expenses are taxable.
15. Social Security. Most people may exclude this entirely. If you have substantial other income, a portion of it may be taxed.
Here are some tax-free items that relate to your investments.
16. Small business stock. If you sell certain stock in a small business, you get half the gain tax-free. (This applies only to qualified stock issued after Aug. 10, 1993.) This is a great deal if some conglomerate wants to buy out your business.
17. Annuities. A portion of every payment you receive from an annuity (the part that represents the return of your investment) is tax-free. This can apply to a traditional IRA if you ever made any nondeductible contributions to it.
18. Roth IRAs. You can withdraw your contributions from a Roth IRA at any time without tax. Qualifying withdrawals will also be tax-free, but you’ll be required to have held the Roth IRA for five years. You can still withdraw your regular contributions, however. (Special rules limit you if you did a conversion rollover.)
19. Municipal bonds. The income from certain bonds issued by state and local governments is tax-free.
20. Life insurance. You don’t get to enjoy it, but your beneficiaries will.
21. Accelerated death benefits. These are “viatical settlements” that are paid out of a life insurance policy for terminally ill patients.
22. Other insurance settlements. You generally don’t have to report insurance settlements that you receive for casualties or loss of property. (If you made some income on the settlement, though, check it out.)
23. Sale of your home. You don’t have to pay tax on up to $250,000 profit on the sale of your home ($500,000 if you are married and file joint returns). To qualify, you must have lived in the home in two of the last five years.
24. Personal injury awards. Certain awards and settlements to compensate you for injury are not taxed.
25. Recovery of items previously deducted. Normally you have to report these as income. For example, if you took a deduction for state taxes last year but got a refund this year, you normally have to report it. But if you didn’t itemize you didn’t get a tax benefit for the deduction, so the refund is tax-free.