Smart Strategies for 2022 and Beyond
Finding ways to earn tax-free income can significantly improve your financial health. Fortunately, there are several legal opportunities to reduce your tax burden. Here are 11 proven strategies that can help you accumulate tax-free income.
1. Tax-Free Income with Roth IRAs
Roth IRAs offer two major tax benefits:
- Tax-Free Withdrawals: Qualified withdrawals after age 59 1/2 are tax-free, as long as the account has been open for five years.
- No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs do not mandate withdrawals after age 72, allowing tax-free accumulation for life.
2. Tax-Free Social Security Benefits
Depending on your income level, a portion of your Social Security benefits may be tax-free. For unmarried individuals with provisional income below $25,000, up to 100% of benefits are tax-free.
3. Tax-Free IRA Withdrawals
If your income is low enough, your standard deduction may cover IRA withdrawals, allowing you to take money out tax-free while still receiving Social Security benefits.
4. Tax-Free Home Sale Gains
If you meet ownership and use requirements, you can exclude up to $250,000 ($500,000 for married couples) of gain from the sale of your principal residence.
5. Tax-Free Capital Gains and Dividends
If your taxable income falls within a specific range, long-term capital gains and qualified dividends can be taxed at 0%. Married couples filing jointly can earn up to $83,350 and remain in the 0% bracket.
6. Capital Gains Sheltered by Losses
Use capital losses to offset capital gains and up to $3,000 of other income. Carry any remaining losses to future years to continue reducing taxable gains.
7. Tax-Free Inherited Capital Assets
Inherited assets receive a step-up in basis, meaning capital gains on inherited property are calculated based on the market value at the time of inheritance, not the original purchase price.
8. Tax-Free Real Estate Exchanges (Section 1031)
Swap investment properties without triggering capital gains tax, as long as the proceeds are reinvested in a similar property within a specific timeframe.
9. Tax-Free Gains from Small Business Stock
Selling qualified small business corporation (QSBC) shares held for over five years may allow for a 100% exclusion on the gain, making it tax-free.
10. Tax-Free College Savings with Section 529 Plans
Earnings in a 529 plan grow tax-free, and withdrawals for qualified educational expenses are not taxed.
11. Tax-Free Withdrawals from Coverdell Education Savings Accounts (CESAs)
CESAs allow you to save for education expenses with tax-free growth and withdrawals for qualified educational costs.
Final Thoughts
Reducing your taxable income is possible with strategic planning and smart investment choices. To learn more about how to maximize your tax-free income, contact us today for a consultation. For more tax tips, check out our article on maximizing retirement savings.
Joy Lutz, CPA, CTP
I help our client’s keep more money in their pockets by implementing proactive tax strategies.
I promise you, working with a CPA and Certified Tax Planner can be much more exciting than crunching numbers and reviewing last year’s taxes.