Updated: 10/29/2010 9:00 AM ET|
8 types of income the IRS can't touch
Don't overpay taxes on income that's protected by the US tax code. Here are the major categories to watch, including 5 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 of it gobbled up by the IRS.
It's not that the agency doesn't want your money. It's just that tax law prohibits the IRS from touching it. And with a bit of planning, you can start cutting your current tax bill and putting money in your pocket now.
Let's look at a few examples.
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, the top rate through the 2010 tax year. 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%. Go here on the site InvestingInBonds.com to compare taxable and tax-free yields. You can also find the after-tax rates on alternative investments of equivalent risk.
Some bonds may not only be tax-free at the federal level, but may also escape state and local taxes. If you're in a top bracket and live in New York City, this is one investment you definitely want to consider for your portfolio.
Commuting to work? Bring a friend -- and his wallet. If you form a carpool to carry passengers to and from work, any payment received from these passengers isn'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 for 20010. 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 a tax law enacted in 1997, if your house was your principal residence for two of the most-recent 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 may be able to 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.
VIDEO ON MSN MONEY
"Assume you're in the 25% bracket for 20010."OK... but I'll be dead then ;)
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