Income the IRS can't touch.
Did you know that certain income is not taxable? More than just municipal bonds too. Most everyone will agree that Municipal Bonds are a great way of generating tax free income, but not everyone will agree it is the best investment for someone with limited funds. So for the person with limited funds or no funds at all, can we do something for them too? Absolutely! I am only going to mention just a few of the ways you save on you taxes by generating tax free income. If the person who does your taxes hasn't mentioned these to you, maybe it's time to see me.
Sell your house
Under the new tax law, 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. The old rules required you to buy up or pay capital gains. With the new rules, you don't have to reinvest the money, and you can claim the exclusion every two years. There is even a partial exclusion if you don't meet the two year test, based on the time of use and ownership. 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 am not sure what the IRS regulations defining "unforeseen circumstances" are, but when I know, you will know.
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.
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.
We also know that 401 K's and 403 B's, IRA's are excellent tax savings and usually exempt from bankruptcy (consult a attorney for more information), What about the person that has no funds, you know, the person who is one step from being homeless and living under a freeway overpass? Can we help them to? Sometimes we can, which is a reason to have someone who really knows taxes do your taxes. For example;
Go back to school.
Improve your education. 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. Even if your company won't offer Back to School benefits, you can still go back to school and may even get a tax credit that is better than writing off continuing education expenses on a Schedule A. You need to find a good tax person who understands how this works.
This is something very few of us talk about. Commuting to work. If you form a carpool to carry passengers to and from work, any money received from your co-workers aren't included in your income. This is important because commuting costs are generally not deductible. If you establish a carpool and you're reimbursed in amounts to cover the cost of your gas, repairs, insurance and similar items used in connection with operating your car to and from work, you have converted a personal nondeductible expense into excludable income.
There are many ways to receive non-taxable compensation. Anytime your company pays, you don't and you are generally not reporting it as income either.
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. 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.
Health coverage. Using or having your company pick up the costs is a win situation for 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 considerably.
Life Insurance 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.
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.