We want you to save tax money. So, let’s introduce you to some incomes that aren’t taxed (in the US).
You will find alternatives abroad. For example, one-third of the family pension, subject to the maximum of Rs. 15,000 will be exempt, if you are a widow in India. 🇮🇳
Similar exemptions apply in other countries as well. However, for the purpose of this piece, we’ll focus on the US. 🇺🇸
Up to $3,000 of Income Offset by Capital Losses
Selling investments at a loss can end up being slightly beneficial. Though not the same, it works in the same manner as seen in the case of Warner Bros where the loss from Batgirl helped lower taxable income significantly.
However, the amount is capped at $3,000 per year. On the plus side, you can carry over capital losses from year to year until you offset your entire loss.
Sale of a Principal Residence
This is one of our favorites because it can help you save a lot of money.
There’s a catch: you must meet the IRS’s ownership and use tests, i.e.:
Those who meet these conditions can exclude up to $250,000 (for individuals) or $500,000 (for married couples filing jointly) from their income (of capital gain) when they sell the property.
So, be wise and choose the right time to sell your primary residence.
Earned Income in these states
Some US states are more tax friendly than others. These eight states have no individual income tax:
Another state that has our interest is New Hampshire, which also does not tax earned income from wages and salary but does tax interest and dividend income. Also, while most states do not tax Social Security income, you will still have to pay taxes on it due to federal laws.
Here are some more incomes that are not taxed in the US:
Employer-Provided Insurance
“In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income,” according to the IRS.
This includes everything from employer-provided long-term care insurance to health insurance provided by your employer through companies like Blue Cross, and reimbursement and coverage for medical care provided through a health reimbursement arrangement.
Furthermore, there are other exceptions, including no tax on the cost of up to $50,000 of employer-provided group term life insurance.
Complicated? Let’s make it simple. ⬇️
It means that you do not owe any tax on the amount your employer pays to give you a life insurance policy. for as long as the death benefit does not cross $50,000 death benefit. However, if the benefit crosses this amount (say $70,000), you will pay tax on the cost paid by the employer to cover the extra $20,000.
Life Insurance Payouts
Losing your loved ones can be devastating and the government understands that. This is why life insurance benefits are tax free; however, there are some exceptions.
You will pay taxes in these conditions:
Retirement Account Income
Income from qualified retirement accounts, including 401(k) plans, IRAs, and 403(b) plans, comes with tax benefits.
In most cases, tax on your investment income is deferred until you withdraw the funds. On the other hand, withdrawals are not taxable when it comes to Roth 401(k)s and Roth 403(b)s, given that you meet all the terms and conditions.
Municipal Bond Interest
Now that bonds are again gaining popularity, it’s time to talk about the tax advantages of municipal bonds.
Bond-related income is usually taxed; however, municipal bonds, issued by states and other government entities, are an exception. You will have to pay no federal or local tax on municipal bonds-related income if you live in the state where the bonds were issued.
This exemption applies to both ETFs and individual bonds but with some limitations. ETF income, however, is subject to federal income tax but no state and local income taxes.
If you talk to a tax expert, they will tell you this ‘tax secret’.
A financial gift is tax free given that you can prove it is a ‘gift’, i.e.: you did not pay anything in return.
This applies to both the receiver and the giver as the lifetime gift tax exemption is $12.06 million for 2022 and $12.92 million for 2023.
There, however, is a caveat.
You will have to pay income tax if the gift ends up earning you income. For example, if it was a painting that you sold to make a profit or a stock that earned you dividends. You will pay tax on this additional income.
Health Savings Accounts (HSAs)
Health savings accounts offer several benefits, including tax advantages as HSA distributions are not taxable. There’s just one condition: expenses must be medical related.
This is a complicated area because inheritances are generally not taxable. But, there are some exceptions.
You may have to pay taxes if the estates are over a certain size. These taxes, however, are paid by the estate itself.
Exemption for 2022 stood at $12.06 million. For 2023, it is $12.92 million. You will have to pay taxes on the amount that goes above these limits.
It might be a good idea to consider these six states as they levy no corporate income taxes:
Wyoming and South Dakota are our favorites as they have very friendly corporate tax laws. The remaining states on the list above do tax gross receipts.
Disability benefits are generally taxable; however, there are some exceptions. You will not pay taxes from benefits you receive from supplemental disability insurance paid for by you, even if bought through your employer, are tax free.
Similarly, benefits you receive from a private disability insurance plan you purchased with after-tax dollars. Also, workers’ compensation, including compensatory damages for all kinds of physical injuries and physical sickness, are tax free. However, punitive damages are not included.
There may be some other exceptions as well. It might be a good idea to talk to a tax specialist and learn more about how specific insurance payments are taxed.
