 |
|
|
|
|
|
|
If "Tax time: 8 types of income the IRS can't touch" is not shown property. Visit the source link above.
|
8 types of income the
IRS can't touch |
| |
Don't overpay taxes on income that's protected by the U.S. tax
code. Here are the major categories to watch, including five types
of raises that don't add a dime to your taxable income.
By
Jeff Schnepper
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 gobbled
up by the IRS.
It's not that the agency doesn't want your money. It's just that
the tax law prohibits the IRS from touching it. And with a bit of
planning, you can start to cut your current tax bill and put money
in your pocket now.
Let's look at a few examples.
Tax-free interest
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 year
2010. 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%.
If you check out this page
at investinginbonds.com, you can compare taxable and tax-free
yields. Compare the after-tax rates on alternative investments of
equivalent risk.
Some bonds may not only be tax-free at the federal level, they
may also escape state and local taxes. If you're in the top
brackets and live in New York City, this is one investment you
definitely want to consider for your portfolio.
Car-pool receipts
Commuting to work? Bring a friend -- and his wallet. If you form a
carpool to carry passengers to and from work, any dollars received
from these passengers aren'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 2008 and
2009. 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 last 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 can 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. |
| |
But this partial
exclusion is only if the sale is required because of either a
change in place of employment, health reasons or unforeseen
circumstances. I haven't yet seen final regulations defining
"unforeseen circumstances." My understanding is that the IRS is
going to be flexible here. |
Tax-free
compensation
When you're due for a raise, ask your company to get creative in
your compensation. There are numerous ways to receive non-taxable
compensation. Let's look at some of the best alternatives to
taxable earned income.
- Use your health coverage. Health and
hospitalization insurance premiums paid by your current or
former employer are tax-free -- a huge benefit. Let's say your
health insurance premiums come to $280 a month or $3,360 a year
(for an HMO policy for a family of four with a $1,500
deductible). If you're in the 25% tax bracket and have to pick
up the bill, the real cost to you would be $4,480. That's
$3,360 for the premiums and $1,120 for additional income taxes
because you'll be paying for the coverage in after-tax dollars.
Having your company pick up the cost helps both of you. It
doesn't have to pay the salary necessary to get you even. It
gets to write off the full cost of the coverage. Plus, neither
of you has to pay the 7.65% payroll taxes on the premiums. And
you, of course, boost your disposable income
substantially.
-
Cover your life. Group term life insurance
coverage of $50,000 or less paid for by your company isn't taxed to
you. You pick the beneficiary; your company pays the premiums. Your
company deducts the expense; you walk away with additional tax-free
income.
- Send yourself to school.
Get educated. The courses don't even have to be job-related.
But they can't be for any education involving sports, games, or
hobbies. Your company can pay, and deduct, as much as $5,250
per year in educational assistance paid for either
undergraduate or graduate courses. Again, that assistance comes
to you tax-free.
|
| |
- Get you there…and
parked. Your company can give
you discount fare cards, passes or tokens to take public
transportation to work. As long as it's not worth more than
$100 per month, your company can deduct it, but you, as an
employee, receive it tax-free as a de minimus tax benefit. You're
taxed only on any excess over the $100. If you drive and have
to pay for parking, your company can provide free parking, up
to a maximum value of $180 per month, to you
tax-free.
-
Cafeteria plans.
These are sometimes called Flexible Spending
Accounts. Your company makes deductible contributions under a
written plan, which allows you to select between taxable and
non-taxable benefits. To the extent you chose non-taxable benefits,
you have no additional income. Available non-taxable benefits may
include group life insurance, disability benefits, dependent care
and/or accident and health benefits. Your individual plan details
the options. You make your choices among the items on the cafeteria
menu.
You get the idea. Any time you can convert
taxable income into non-taxable income, you've given yourself a
raise. And when both you and your company save money, it's a
win-win for
everybody. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|