Jobs & MoneyTax Tips

Income The IRS Can’t Tax

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By Alix

Think you need to include ALL income on your tax return? Think again!

There are several sources of income the IRS tax code does not allow to be taxed.

Below I’ve listed a few types of income that you should not include on your tax return.



#1 – Tax Free Interest

Tax free interest includes any interest earned on municipal bonds (bonds issued by a state, territory, or political subdivision). These are tax free because the government wants you to invest in these bonds and therefore include their tax free status as an incentive.The interest on these bonds is not only excluded at the federal level, but it may be excluded at the state or local level as well. Check with your state and specific type of bond to ensure at what level it is excluded from your taxes.


#2 – House Sales

Gains on investments are typically included in income, however there is an exclusion for home sales. If the house being sold was your principal residence for at least 2 of the last 5 years, then you can exclude up to $250,000 in gains ($500,000 for married filing jointly) for the year you sell. If you do not meet the 2 year requirement and need to move because of “unforeseen circumstances”, then you are able to exclude a proportion of the gain based on how long you resided in the house. This exclusion can be claimed every 2 years.


#3 – Carpooling

Besides being more friendly to the environment, carpooling can potentially be more friendly to your wallet as well. If you carpool to and from work, any money received from your passengers should not be included as income. Therefore, if you receive $100/month for carpooling with people to work, none of it is included as income. However, any commuting costs are not deductible on your return.


#4 – Group Life Insurance

While this technically is not money in your pocket, any employer-paid group term life insurance up to $50,000 is not included as income to you. Another attractive feature of this employee benefit is that YOU get to pick the beneficiary of the life insurance. Therefore, as an employee benefit, you pay no money for being insured. However, any group term life insurance over $50,000 is taxable. This is because the life insurance premiums are basically another form of compensation and the IRS deemed anything over $50,000 to be excess, and therefore taxable.