How does a 0% tax rate sound. Opportunities are rare, but here are some ways to earn or receive income, without paying taxes on it.
- Contribute to a Roth IRA – For most people, this is a no-brainer. The Roth is a retirement account that allows the money contributed to grow completely free of taxation as long as you make no unqualified withdrawals. As an example, let’s suppose that you sock away $50,000 over your lifetime into a Roth IRA which grows to $350,000. When you retire and start taking money out of the Roth, that $300,000 in earnings is completely tax free. The longer you save and the higher your tax bracket, the more beneficial the Roth will be. In comparing a Roth to a Traditional IRA, a useful analogy might be seed corn. With a traditional IRA, you don’t pay taxes on the seed but will pay an unknown amount on the corn when you harvest (it’s unknown because you don’t know future tax rates or what your tax bracket will be when you retire). With a Roth IRA, you pay taxes on the seed but none on the harvest.
- Sell your home – we talk to people every month that are downsizing or moving or whatever and are worried about the taxes they are going to owe when they sell their personal residence. If your gain on the sale is less than $500,000 (for a married couple, $250,000 for a single person) and you have lived in the home for 2 out of the last 5 years, you will not have to pay any taxes on that gain (assuming your home was not used in a business in which depreciation was deducted, such as a day care).
- Invest in municipal bonds – these are debt obligations of cities, states, counties or other government entities that help fund projects in their respective locales. Interest earned on these bonds is tax-free on the federal level and, if you buy a bond in the state in which you live, it is most likely (not 100%) not taxable on the state level either.
- Hold your investments for the long term and the capital gains when you sell may be tax-free. If you are in the 10 or 15% tax brackets, the Federal tax on those long-term capital gains is 0. If you are in one of the higher brackets, from 25% to 39.6%, the tax rates on those gains is only 20%, resulting in a tax savings.
- Contribute to a Health Savings Account (HSA). There are 3 conditions for this strategy to work; you have to be enrolled in a high-deductible health plan, you can’t be enrolled in Medicare and you can’t be a dependent on someone else’s return. If you meet these conditions, you and your employer can contribute to an HSA account and the contributions, up to certain limits, are deductible on your Federal return. If you withdraw the money and use it for qualified medical expenses, any such withdrawals are tax-free.
- Gifts from any individual to another are not taxable to the receiver of the gift. So, if your parents want to give you $14,000 each, it is not taxable to you. If you are married, they can each give you and your spouse $14,000 for a total of $56,000 with no tax consequences for either of you.
- Finally, if you want to make a little extra cash, consider renting out your home. As long as the rental period is 14 days or less, the income received is completely tax-free.
Tax-free income. It just takes a little planning. Give us a call.