August 7, 2009 12:00 am

Take Advantage of Tax-Free Income Opportunities

With tax rates almost certain to rise in coming years, now is a good time to focus in on tax-free income. The tax law has many situations in which you can receive income on a tax-free basis. Here is a roundup of items that are tax free for 2009, including any limitations that may apply:

Your Job

  • Adoption costs paid by your employer up to $12,150
  • Awards to certain employees (usually up to a limit of $1,600)
  • Education assistance paid by your employer up to $5,250 if not job related or any amount if job related
  • Dependent care expenses paid by an employer up to $5,000
  • Foreign earned income exclusion up to $91,400
  • Fringe benefits if they are de minimis, an employee discount, a working condition fringe, or a transportation fringe benefit
  • Meals and lodging furnished on the employer’s premises for the convenience of the employer
  • Military benefits, including combat pay
  • Minister’s housing allowance
  • Moving expenses paid or reimbursed by your employer
  • Peace Corps payments for housing, food, utilities, and clothing
  • Retirement planning advice paid by your employer
  • Unemployment benefits up to $2,400

Your Investments

  • Capital gains and capital gain distributions to those in the 10% or 15% tax bracket
  • Dividends to those in the 10% or 15% tax bracket
  • Interest on insurance dividends left on deposit with the Department of Veterans Affairs
  • Municipal bond interest (other than interest on Build America Bonds)
  • Renewal community or District of Columbia gain on certain business assets
  • Small business stock gain up to 50% (70% for stock acquired after February 17, 2009, and before January 1, 2011; 60% for stock of corporations in empowerment zones)

Your Retirement Income

  • IRA distributions up to $100,000 transferred to charity if you are at least 701/2 years old
  • Roth IRA withdrawals as long as you are over age 591/2 or disabled and you’ve had the account for at least 5 years
  • Social Security benefits if your income (including tax-free interest) is below set amounts
  • IRA rollovers

Your Health

  • Accelerated death benefits under a life insurance policy
  • COBRA subsidy of 65% of premiums up to 9 months for those who were involuntarily terminated from their job before January 1, 2010
  • Damages received for personal injury or illness
  • Disability payments under a policy in which you paid the premiums
  • Health reimbursement arrangements under an employer plan
  • Health savings account withdrawals to pay medical costs
  • Long-term care benefits under a policy to pay for the care of someone who is chronically ill ($280 per day if benefits are paid under a per diem contract)

Your Home

  • Home sale gains up to $250,000 ($500,000 on a joint return) if certain conditions are met
  • Mortgage assistance payments under Section 235 of the National Housing Act
  • Mortgage debt cancellation on a principal residence for debt up to $2 million ($1 million for married filing separately)
  • Mortgage loan proceeds (including proceeds on refinancing)
  • Real estate tax rebate for volunteer emergency responders up to $360 per year
  • Vacation home rental income if the rental is no more than 14 days during the year

Your Education

  • 529 plan withdrawals to pay for qualified higher education costs
  • Coverdell education savings account withdrawals to pay education costs
  • Savings bond interest if used to pay qualified higher education costs and your income does not exceed set levels
  • Scholarships, fellowships, and grants covering tuition, fees, books, and supplies and equipment for a degree program
  • Student loan debt cancellation by a qualified lender for those who work in certain professions
  • Tuition reduction for employees of educational institutions

Miscellaneous Items

  • Child support payments
  • Crime victim payments from a state fund for this purpose
  • Debt discharge during insolvency or bankruptcy
  • Disaster relief payments and disaster mitigation grants
  • Discounts on purchases you make (e.g., rebates on car purchases)
  • Federal income tax refunds
  • Foster care payments
  • Frequent flyer miles
  • Gifts
  • Historic preservation grants under the National Historic Preservation Act
  • Inheritances
  • Life insurance proceeds
  • Loan proceeds to build.
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Tax Glossary

Straddle

Taking an offsetting investment position to reduce the risk of loss in a similar investment.

More terms