Nontaxable income should be utilized whenever possible, as it allows more money to stay in your pocket rather than go the government.
There are different types of nontaxable income that can range anywhere from Health Savings Accounts to financial gifts. But how does each of these work?
Here are the 10 types of nontaxable income that you should be aware of.
1Health Savings Account
Health Savings Accounts (HSA) are a type of nontaxable income, as you contribute pre-taxed dollars to the account. You must use them for expenses that are related to your health. Depending on the company that you have your health savings account set up with, you can use these dollars towards anything that is qualified as a health expense.
This could mean buying vitamins and supplements, picking up prescriptions, or simply going to the doctor to pay your co-pay. Each plan has different regulations and you should get into contact with your insurance providers to see if they offer any form of an HSA.
While inheriting wealth and other items can be somber, you at least don’t have to pay taxes on that wealth inherited (up to a certain extent). If your grandmother leaves you several stocks and a large financial sum, you don’t have to worry about paying any taxes on them.
But if instead, your grandmother leaves you her estate, which includes a sizeable piece of property, you will have to pay estate taxes. This is only if the estate falls above the $11.7 million limit of receivable gifts.
Speaking of receivable gifts, you’re also allowed to receive up to $15,000 a year from any given person without needing to pay taxes on it. As an example, if you’re a married couple and you want to give your niece a graduation gift, you can each give her $15,000, for a total of $30,000.
Once you go over the $15,000, you may have to pay taxes, depending on the amount you’ve received in your lifetime. Any gift over $15,000 does need to be filed but doesn’t necessarily mean that you’ll pay taxes.
You’re also allowed to receive gifts and not have to worry about taxes if it relates to tuition or medical expenses.
4Retirement Account Income (Roth)
When you contribute to a Roth retirement account, you don’t have to pay taxes on the gains until you start to withdraw your money. This means dividends or gains that the account makes while you’re still contributing or before you retire won’t be taxed.
This does not apply to a traditional IRA, as those contributions are pre-tax compared to the Roth IRA, which gets its contributions from post-taxed dollars.
If you want to learn more ways to maximize your income through investments, then be sure to check out https://wealthability.com/tax-strategy/ for their ability to help with reducing your taxes as much as possible.
5Municipal Bond Interest
While you’ll have to pay taxes on federal bonds, municipal bond gains are not taxable. This is a win-lose situation though, as the returns are not as high as federal bonds.
However, these returns may be better for those that fall into a higher tax bracket, as the after-tax return could be greater than the higher yield bonds.
6When You Sell a Principal Residence
Are you and your spouse about to sell your principal residence and move across the country? If your house has skyrocketed in value, you’ll be able to collect the extra value from the house and not pay taxes on it. This has a limit of $250,000 for individuals and $500,000 for couples.
There are a few rules for considering a residence as your principal residence. You need to have lived there for at least two out of the last five years and owned it for at least two out of the last five years. This can make that move less burdensome and even kickstart a decent retirement account.
7Life Insurance Claims
While the thought of collecting life insurance is morbid, it does count as an income that isn’t taxed. This can help lessen the burden of losing a loved one, knowing that the money they left behind for you doesn’t get taken away.
There are different rules for those that are still alive and want to transfer their life insurance to another account. These instances may require you to pay taxes.
If you’ve gone through a divorce and you settled to have alimony paid to you, you don’t have to pay taxes on this income, as long as it was after 2018. Often, these payments are made before taxes are taken out, which means that the person who pays the alimony will still have to pay taxes on it.
The only time this doesn’t apply is if you set up alimony payments directly, rather than garnish from wages. In this instance, you’re using post-taxed money to make the payments.
A common sales technique that companies will use to get people to try their product is by offering cash rebates. These rebates happen after the purchase has already happened, so you’ve already technically paid your taxes on the rebate.
Because these are cash rebates, they are harder to track compared to checks or other forms of rebates.
10Child Support Payments
Child support payments fall into the same category as alimony payments. They’ll come out directly from the paycheck and the payer will have to pay taxes on it at the end of the year.
Use These Nontaxable Income Methods To Maximize the Money In Your Pocket
Now that you know what falls under nontaxable income, hopefully, you’ll feel less stressed about what you have to pay taxes on. In these instances, your money is your money and there is no government that can withdraw it from you.
If you want to learn more about how to tackle life and the curveballs it can send at you, be sure to check out the rest of the blog. If you know someone that has questions about nontaxable income, then be sure to share this article with them.