The IRS Cannot Touch These Types of Income

To prevent IRS problems like a wise taxpayer, you understand you should not be paying less or more of what you owe the IRS in taxes. What numerous taxpayers do not realize is that there are various income types that the government cannot collect taxes on legally.

Because tax law doesn't allow it, the IRS cannot tax particular types of income. You can keep your money if you understand what the IRS can't tax you with, but to prevent tax problems, you must do it right.

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 which 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 basically rises when your marginal tax rate increases. Essentially, if your overall income rises, the value of the bonds increases in parallel.

Money earned from charging payments in a car pool is a source of income that can't be taxed. If you happen to drive to work every day in a car pool and charge your passengers a small payment, that money can be excluded from your reported earnings without an IRS problem.

The selling of a house is a source of income that involves many people. When you sell your house, you can exclude revenue gained of up to $250,000. If 2 people file a joint tax return, the amount can go as high as $500,000. You don't have to reinvest the money and you can claim this exclusion every 2 years. Also, if you happen to sell your home earlier than the two years, you will still be able to claim a partial exclusion. As an example, you can exclude half of the $250,000 limit if you sold your house after a single year and you made a revenue of $75,000. Since that $75,000 is less than half of the $250,000, you can, in essence, pay no sales tax on that transaction. An error, though, could cost you $75,000 rather than keeping it, so be sure you do this right by consulting a tax professional as there are other restrictions.

A lot of people think that a raise can only be had as more money in their paychecks. You may in truth be able to ask your employer for a more unique way of a raise, depending on your situation. For example, if you get your employer to pick up the cost of a better insurance option, this saves you money and makes it impossible for the IRS to tax your raise. Also, if you pick a higher healthcare policy, you would be making those payments with after-tax money, compared to having your employer cover the payment for you. When you pick an option such as this, you win in numerous ways without the hassle of addressing any potential IRS issues.