They say that the only things for sure in this world are death and taxes.  Well, you may be surprised to find out that there are certain types of income that are not subject to Federal Income Tax.

Interest earned on bonds issued by a state, territory, municipality or any political subdivision is free from federal taxes.   These municipal bonds are more valuable the higher your tax bracket.    If you were in the top tax bracket of 35%, an interest rate of 5% that is tax free is equivalent to earning 7.69% interest.   Some municipal bonds are even tax free on the state level.

The cost of commuting to and from work is usually not deductible.   If you form a car pool, any money you receive from your passengers is not subject to federal tax.  In this way you can convert personal nondeductible expenses into tax free income.

Under current law, if your house was your principal residence for two of the last five years, you can exclude as much as $250,000 in gain (or $500,000 on a joint return) when you sell your house.  You do not have to reinvest the money and you can claim this exclusion every two years.

Now for some bad news.    There are certain taxing events that can also surprise you.   If you serve on the board of a nonprofit organization, you may find that you are personally responsible, under the “responsible party rule” for the taxes that need to be withheld from the compensation paid to the organization’s employees.    If you arrange for a creditor to forgive all or part of a debt you owe, the amount that you saved is considered income and subject to federal income tax.   Both Social Security and Unemployment benefits you receive are subject to federal income tax.

In Part 2 we will explore some ways in which your employer can help ease your tax burden.