The IRS Cannot Touch These Types of Income

To avoid IRS issues like a wise taxpayer, you understand you should not be paying less or more of what you owe the IRS in taxes. What many taxpayers don’t realize is that there are particular income types that the government cannot collect taxes on legitimately.

The IRS can’t tax certain income types since it’s not allowed by tax law. Understanding what the IRS cannot tax can let you keep your money, but you need to do everything right to avoid tax problems.

Tax-free interest is one of these income types. This is income earned from instruments such as 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 rises when your marginal tax rate goes up. Essentially, if your overall income rises, the value of the bonds rises in parallel.

Money made from collecting fees in a car pool is a source of income that can’t be taxed. 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. If you sell your home, you can exclude up to $250,000 in profits, $500,000 if you file a joint return with your spouse. Every 2 years, you can claim this exclusion. If you sell your house after less than 2 years, you can also claim a partial exclusion. Obviously, you want to ask a tax professional to ensure that you are doing this the right way as there are a few restrictions.

Getting a raise doesn’t only mean getting an increased paycheck amount. Your employer can pick up the cost of a higher healthcare plan or a better insurance option instead, if you prefer. You won’t have to address possible IRS problems because the IRS will not be able to tax your raise.

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