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.