Tax Free Income

After visiting your tax preparer and seeing just how much tax you paid this year, you may find yourself asking:

How can I pay less tax?

Many taxpayers overlook the fact that not all income is treated the same when it comes to paying taxes. Did you know some income generates a higher tax liability than other income? Understanding the difference may save you thousands a year. Here are a few types of income with zero tax liability.

1. ROTH withdrawals- ROTH must be at least 5 years since the first contribution. If you are less than 59 1/2years old, you will likely pay 10% penalty.

2. Minister’s housing allowance- This income is subject to self-employment tax.

3. Combat pay and most VA benefits & service-related disability. In addition, many states, Utah included, do not tax military retirement.

4. Peace Corps living allowance

5. Long-term care insurance payments

6. Wrongful imprisonment

7. State funded in-home & foster care payments.

8. Property settlements in divorce, including cash.

9. Child support

10. Alimony (for divorces finalized after 2018)

11. Scholarships for degree candidates for tuition, fees, books & supplies.

12. Life insurance proceeds and accelerated death benefits.

13. Inheritances, except for pretax retirement accounts. Be thoughtful when cashing them out. Spreading payments over several years will likely yield a lower tax bill as opposed to taking a lump sum in one year.

14. Gifts and Rebates.

15. Qualified employer-provided fringe benefits such as health insurance.

16. Municipal bond interest income.

17. Personal physical injury lawsuit settlements

18. Disaster relief

19. Disability and Worker’s Compensation

20. Up to $500,000 profit from sale of your personal residence for Married couples. Up to $250,000 for single and head of household.

If none of these income types fit your situation, there are other legal ways to reduce your tax bill. The most common strategies include saving for retirement in an IRA or 401K. A health savings account (HSA) is also another great way to save on tax now and save for your future medical costs.

If you have maxed out retirement and health savings accounts, a brokerage account could be a good choice. When trading, consider holding for more than one year to get the more favorable long-term capital gains rate. Short term capital gains are taxed as ordinary income, the same marginal rate as your wages. Long-term gains are taxed at a lower rate than your marginal rate. In some cases, long-term capital gains are taxed at 0%.

There are a lot of choices when it comes to reducing taxes. The best choice for you, depends on your unique tax situation. What reduced your neighbor or colleagues tax liability, may not work as well for you. A Neighbor Tax professional can discuss the best options for you and create a strategic tax plan. Book an appointment to get started.