If you are a wise taxpayer, you are aware that you shouldn’t pay the government more or less than what you owe in taxes to avoid IRS issues. What many taxpayers do not realize is that there are particular income types that the government can’t collect taxes on legally.
The IRS can’t tax particular income types because it’s not allowed by tax law. Being aware of what the IRS cannot tax can let you keep your money, but you have to do it right to prevent tax issues.
One of these types of income is tax-free interest. This is income earned from political entity entitled to freedom from federal taxes like income earned from state-issued bonds and other instruments. These investment instruments are more commonly called municipal bonds, and when your marginal tax rate goes up, the value of their tax benefit also rises. In plain speak, the value of the bonds increases in parallel to the increase of your overall income.
Making money from a car pool is another income that cannot be taxed. You can exclude your car pool profits without IRS issues.
Another source of income that is 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. This exclusion can be claimed every 2 years. If you sell your home after less than 2 years, you can also claim a partial exclusion. There are various restrictions, so it is advised to consult a tax professional to make sure that you’re doing this right.
Most people believe that when they get a raise at work, they can only get it in the form of more money in their paychecks. In truth, depending on your situation, it may be a good choice to ask your employer to give you a more unique form of a raise. As an example, you can save money as it’s impossible for the IRS to tax your raise if you get your employer to pick up the cost of a better insurance policy instead. Also, if you select a higher healthcare policy, you would be making those payments with after-tax money, as opposed to getting your employer pick up the payment for you. When you select an option such as this, you win in various ways without the headache of handling any possible IRS problems.
