8 types of income the IRS can't touch

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 nontaxable 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 $280 a month or $3,360 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 $4,480. That's $3,360 for the premiums and $1,120 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. It 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; 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 yourself there . . . and parked. Your company can give you discount fare cards, passes or tokens to take public transportation to work. As long as it is not worth more than $120 a month in 2009, your company can deduct it, but you, as an employee, receive it tax-free as a de minimus tax benefit. If you drive to work in 2009 and have to pay for parking, your company is now able to provide you free parking, up to a maximum value of $230 a month, 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 nontaxable benefits. To the extent you choose nontaxable benefits, you have no additional income. Available nontaxable 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.

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

Get creative . . . in most cases you're paying for the items anyway, and on an after-tax basis. It's really relatively simple.

Updated July 7, 2009

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