The IRS Cannot Touch These Types of Income
The IRS should not be paid more than what’s owed in taxes, and smart taxpayers understand this. They understand that getting a huge refund every year means that they overpaid and essentially loaned money to the government entirely interest-free. And since it may lead to IRS problems, you also do not want to underpay and owe the government money. However, what numerous people don’t know is that there are various types of income that the government legally can’t collect taxes on. As a matter of fact, not many taxpayers are aware that there are ways to keep the IRS at bay.
Since tax law doesn’t allow it, the IRS can’t tax certain types of income. Being aware of what the IRS can’t tax can help you keep your money, but you must do it right to prevent tax issues.
One of these types of income is tax-free interest. This is income earned from instruments like state-issued bonds, or any other political entity that is entitled to freedom from federal taxes. Municipal bonds is the common name for these types of investment instruments, and the value of their tax benefit essentially goes up when your marginal tax rate rises. Basically, if your overall income rises, the value of the bonds rises in parallel.
A very little known source of income that cannot be taxed is money that’s made from collecting fees in a car pool. The money you charge your passengers in a car pool can be excluded from your reported earnings with problems with the IRS.
Another source of income that’s excluded from taxes is selling your home. You can exclude up to $250,000 if you sell your home, and if you file a joint return with your spouse, $500,000. Every 2 years, you can claim this exclusion. If you sell your home after less than 2 years, you can also claim a partial exclusion. There are various restrictions, so it’s advised to consult a tax professional to ensure that you’re doing this correctly.
Getting an increased paycheck amount isn’t the only way of getting a raise. You can opt to have your employer cover the cost of a better insurance policy or a higher healthcare policy. This makes it impossible for the IRS to tax your raise and you won’t need to deal with potential IRS issues.
Filed under Blog by on Sep 30th, 2009. 
