20 Tax-free Income Sources – The Perfectly Legal Ways to Get Money Without Paying Taxes

March 25, 2021March 25, 2021 Gary Horner

Making tax deductions is a fairly common concept of tax saving and planning. You must have received plenty of good advice in this regard. In fact, all the standard tax deductions applicable to your income profile must already be on your tips by now.

Let’s introduce you to a less common way of saving taxes i.e., some earning avenues that are legit tax-free.

Interested? Read on, and see if any of these work for you!

1. Health Savings Account

Contributions to Health Savings Accounts can be made by your employer too. Though such contributions are a part of your employment benefit, they don’t count towards your taxable income. When you withdraw money from the Health Savings Account for paying medical bills, that amount is also not taxable.

2. Life Insurance Proceeds

Obtaining life insurance for yourself and your family members is a wise financial decision. In addition to the compensation in case of death, there are multiple benefits you can avail yourself in your lifetime. Life insurance schemes act as good savings options. And any premium refunds you get from your life insurance plan also account for your tax-free income.

3. Sickness Pay Benefits

Some insurance policies offer sickness pay benefits as well. Any amount you receive under such an insurance plan is not taxable. You may also be getting sickness compensation from your employer or state disability fund, but these receipts are still taxable.

4. Worker’s Compensation

Under workmen’s compensation act, it’s the employer’s liability to pay compensation for any injury sustained by their employees during the course of their duty. Workers also have a right to receive compensation from the employee in case of occupational sickness. Such compensation is exempt from income tax.

5. Compensatory Damages

You may have received money as compensation for sickness or injury in a legal settlement. The money you receive may be in a lump sum or in installments. All such compensatory damages qualify as income exempt from taxes.

6. Governmental Benefit Payments

If you’ve received payments from government-sponsored public welfare funds or any other form of public assistance, that will count towards your tax-free receipts.

7. Social Security Benefits

Good news for those whose income sources are limited to Social Security Benefits! All your income is tax-free. If you’re earning from other sources as well, you still get the benefit if your modified adjusted gross income doesn’t exceed the exemption limit.

Does this sound too tax-savvy for your understanding? Why not search for a “tax attorney near me“, and get your queries resolved.

8. Interest Income from Certain Savings

Tax planners and financial advisors always advise their clients to invest in saving bonds. For instance, the amount received by redeeming education savings bonds (Series EE issued after 1989 or series I) can be counted as your tax-free income if you pay higher education tuition fees that qualify for such exemption.

9. Income from Sale of Your House

If you’ve lived in a house for at least two years, and owned it for more than five years, that puts you in a special place under the tax law. When you sell the house, the profit that you make on the sale is not taxable.

10. Rental Income (short term)

House rental income is generally taxable. But there is an exception to the rule too. If you’ve rented your house only for a short term, i.e. less than 15 days in a year, the income remains exempt from federal income tax.

11. Gifts and Inheritance

As a general rule, the property received as gift or inheritance does not count towards your taxable income.

12. Airline Miles

All frequent fliers should be aware of this tax-free earning. Miles earned through airline travel are not counted towards your taxable income.

13. Reimbursements for Carpool

Carpooling to work these days? Here’s how the government appreciates your efforts. Any reimbursements you get from your colleagues for this arrangement counts towards your tax-free income.

14. Child’s Income

The income of any individual is taxed at applicable rates only. The applicable rate for income earned by a child is “nil” up to a certain limit. This means that if your child makes money through full-time or part-time employment, even though that counts as your household income, it is not taxable. Ask your tax attorney about the current year’s filing threshold under which the child’s income is not taxable.

15. Peace Corps Allowances

All Peace Corps volunteers, rejoice! The living allowances you receive for housing, food supplies, utilities etc. are exempt from income tax. But, let’s remind you allowances for any other pursuits other than these basic necessities are still taxable.

16. Gain on Foreign Exchange

It’s easy for you to earn some legit tax-free income on foreign exchange transactions. If the exchange rates are in your favor, and you can make some money on personal foreign currency transactions, you don’t need to add that amount in your taxable income. But if your gain is more than USD 200, you’ll have to pay taxes since this counts as a capital gain.

17. Educational Assistance from Employer

If your employer sponsors your specialization course or further education expenses, the financial assistance can be claimed as tax-free income. This factors in not just the tuition money, but also expenses incurred on books, study materials, equipment and supplies. Remember, however, that the amount permissible for this benefit is limited to USD 5250 only.

18. Scholarships

Bright scholars can count this tax exemption as another of their rewards. Only certain type scholarships and fellowships qualify as tax-free, while the rest are taxable. This includes scholarship received for paying tuition fee of a course from a recognized educational institution.

19. Tax Refunds

Any amount you receive from the government as income tax refund is exempted from taxation. This is quite logical, but still sounds quite relieving. Doesn’t it?

Be careful, though. This rule doesn’t apply to tax refunds from local or state authorities.

20. Olympic Prizes

This tax exemption has been extended as a part of a significant tax reform announced under President Obama’s regime. So if you’re an Olympic or Paralympic athlete, your gold, silver and other prizes are out of the income tax ambit.