Don’t overpay taxes on income that’s protected by the U.S. Tax Code. Here are the major categories to watch, including five types of raises that don’t add a dime to your taxable income.

Want to keep the tax man away from your money? It’s easier than you think. There are lots of ways to increase your wealth without having a chunk gobbled up by the IRS.

It’s not that the agency doesn’t want your money. It’s just that the tax law prohibits the IRS from touching it. And with a bit of planning, you can start to cut your current tax bill and put money in your pocket now.

Let’s look at a few examples.

Tax-Free Interest

Interest earned on bonds issued by a state, territory, municipality or any political subdivision is free from federal taxes. These are generically called municipal bonds, and their tax benefit increases in value as your marginal tax rate goes higher. (In other words, the bonds are worth more to you as your overall income rises.)

Assume you’re in the 35% bracket. A 5% tax-free rate becomes the equivalent of a taxable rate of 7.69%. In the 15% bracket, the taxable equivalent is only 5.88%. If you check out investinginbonds.com, you can compare taxable and tax-free yields. Compare the after-tax rates on alternative investments of equivalent risk.

Some bonds may not only be tax-free at the federal level, they may also escape state and local taxes. If you’re in the top brackets and live in New York City, this is one investment you definitely want to consider for your portfolio.

Carpool Receipts

Commuting to work? Bring a friend — and his wallet. If you form a carpool to carry passengers to and from work, any dollars received from these passengers aren’t included in your income.

Commuting costs are generally not deductible. But if you establish a carpool and you’re reimbursed in amounts sufficient to cover the cost of your repairs, gas and similar items used in connection with operating your car to and from work, then you’ve converted personal nondeductible expenses into excludable income.

Assume you’re in the 25% bracket (down from 27% in 2002). You have to earn $133 per month to cover a $100 monthly commuting expense. If you have a carpool arrangement with expenses being reimbursed, you’ve got no additional income. But you do have an additional $133 per month in wealth!

Sell Your House

Under the tax law enacted in 1997, if your house was your principal residence for two of the last five years, you can exclude as much as $250,000 in gain ($500,000 on a joint return) when you sell it.

You don’t have to reinvest the money, and you can claim the exclusion every two years. (If you’ve got $500,000 in gain every two years, I want to meet your real estate agent and go shopping!)

If you don’t meet the two-year rule, you can get a partial exclusion based on the time of use and ownership. Assume you sold after only one year and had a $50,000 profit. Your exclusion is half the $250,000, not half the $50,000 profit. In this case, you’d pay zero tax on the sale.

But this partial exclusion is only if the sale is required because of either a change in place of employment, health reasons or unforeseen circumstances.

The key is to qualify for the partial exclusion if possible. “Change in employment” covers anyone who lives in the household. The person doesn’t even have to be an owner of the property. The “change in employment” must be the primary reason for the move. There’s a “safe harbor” that assumes that it was the primary reason if your (or whose ever) new job is at least 50 miles farther from the residence sold than where you used to work.

But if you don’t meet the “safe harbor,” all is not lost. You’ll just have to prove (if you’re audited) that it was the primary reason for the move based on the facts and circumstances of your case.

Health reasons include advanced-age-related infirmities, the need to move to care for a family member, or to obtain or provide medical or personal care for a qualified individual suffering from a disease, illness or injury.

“Unforeseen circumstances” are where the IRS really became consumer-friendly. Safe harbors here include divorce, death, multiple births from the same pregnancy and even a change in employment or self-employment status that results in your inability to pay the costs and living expenses of your household. So, if your income goes down, or even if your spouse or other co-owner’s income goes down, you can qualify for a partial or even a full exclusion.

Even if you don’t qualify for one of these “safe harbors,” you might still qualify on the basis of your specific facts and circumstances.

Tax-Free Compensation

When you’re due for a raise, ask your company to get creative in your compensation. There are numerous ways to receive non-taxable compensation. Let’s look at some of the best alternatives to taxable earned income.

Use your health coverage. Health and hospitalization insurance premiums paid by your current or former employer are tax-free — a huge benefit. Let’s say your health insurance premiums come to $1,280 a month or $15,360 a year (for an HMO policy for a family of four with a $1,500 deductible). If you’re in the 25% tax bracket and have to pick up the bill, the real cost to you would be $20,480. That’s $15,360 for the premiums and $5,120 for additional income taxes because you’ll be paying for the coverage in after-tax dollars. Having your company pick up the cost helps both of you. The company doesn’t have to pay the salary necessary to get you even. It gets to write off the full cost of the coverage. Plus, neither of you has to pay the 7.65% payroll taxes on the premiums. And you, of course, boost your disposable income substantially.

Cover your life. Group term life insurance coverage of $50,000 or less paid for by your company isn’t taxed to you. You pick the beneficiary; your company pays the premiums. Your company deducts the expense — and you walk away with additional tax-free income.

Send yourself to school. Get educated. The courses don’t even have to be job-related. But they can’t be for any education involving sports, games, or hobbies. Your company can pay, and deduct, as much as $5,250 per year in educational assistance paid for either undergraduate or graduate courses. Again, that assistance comes to you tax-free.

Get you there . . . and parked. Your company can give you discount fare cards, passes or tokens to take public transportation to work. As long as it’s not worth more than $100 per month, your company can deduct it, but you, as an employee, receive it tax-free as a de minimis tax benefit. You’re taxed only on any excess over the $100. If you drive and have to pay for parking, your company can provide free parking, up to a maximum value of $190 per month, to you tax-free.

Cafeteria plans. These are sometimes called Flexible Spending Accounts. Your company makes deductible contributions under a written plan, which allows you to select between taxable and non-taxable benefits. To the extent you chose non-taxable benefits, you have no additional income. Available non-taxable benefits may include group life insurance, disability benefits, dependent care and/or accident and health benefits. Your individual plan details the options. You make your choices among the items on the cafeteria menu.

Employee death benefits. Amounts received as death benefits by your family or by your estate may be excluded up to an aggregate amount of $5,000 whether paid directly or indirectly by your employer.

Merchandise distributed to employees on holidays. Merchandise distributed to you as an employee on holidays, such as Martin Luther King Day or Christmas, is excludable from your income if it is not of substantial value and is given for substantially noncompensatory reasons.

Expenses of your employer. The law does not tax reimbursement expenses that are true reimbursements for expenses of your employer rather than income amounts truly compensatory in nature. In this category are cab fares and supper money. For example: If you can arrange with your employer to provide you with breakfast, lunch or supper money, these personal expenses are deductible by your employer but not taxable to you.

Meals and lodgings. The value of meals and lodgings provided to you, your spouse, and your dependents without charge by your employer is not taxable income if the following three criteria are met:


The meals or lodgings are provided at your employer’s place of business.


The meals or lodgings are provided for the employer’s convenience.


In the case of lodging (but not meals), you must accept the lodging at your employer’s place of business as a condition of your employment. This means that you must accept the lodging to carry out the duties of your job properly. For example, if you must be available for duty at all times, your lodging qualifies. Lodging includes the cost of heat, electricity, gas, water, sewarage service, and similar items that are necessary to make a lodging habitable.


If you receive a cash allowance from your employer for meals and/or lodging, you must include the cash allowance in your income. The solution, therefore, is to have your employer provide the food and lodging, not the dollars.

Employee discounts. You need not include as taxable income the discounts or privileges of relatively small value that you receive where such discounts are given primarily to provide good employee relations and do not take on the character of additional compensation. This exclusion includes the usual courtesy discounts allowed to employees in many retail stores.

Workers’ compensation. Workers’ compensation received for sickness or injury is fully exempt from income tax. If you turn over your workers’s compensation payments to your employer, and all or part of your regular salary continues to be paid, only the excess of the salary payments over the amount of workers’s compensation is taxable income.

Employee awards. Up to $1,600 may be excluded from employee income under a qualified award plan. A qualified award plan is one that does not discriminate in favor of officers, shareholders or highly compensated employees. If an award is not a qualified plan award, up to $400 may be excluded from employee income.

Clergy housing allowance. If you’re a member of the clergy, you can exclude from taxes part of your income that’s attributed to housing. The amount you exclude is equal to the fair market value of the property or the amount used to provide the home, whichever is less.

You get the idea. Any time you can convert taxable income into non-taxable income, you’ve given yourself a raise. And when both you and your company save money, it’s a win-win for everybody.

Get creative . . . in most cases you’re paying for the items anyway, and on an after-tax basis. It’s really relatively simple. “Better get some untaxed income . . ” as Fagan sings in the musical Oliver.