This year, many Americans have made more money to make up for inflation and the high cost of living, but the more money they make, the more tax they have to pay.
Generally, most people want to keep as much of their income as possible, so how can they make that happen? One of the most common ways is to maximize your non-taxable income. Let’s examine how to do that.
Taxable Income vs. Non-Taxable Income: What’s the Difference?
Before we explore how to maximize non-taxable income, it’s a good idea to understand the difference between non-taxable income and taxable income.
Taxable income is the amount of income subject to tax after deductions and exemptions. If we look at this from the perspective of an individual, taxable income includes wages, salaries, bonuses, commissions, and tips.
According to TurboTax, the IRS also classifies even more income as taxable. Some of this includes jury duty fees, severance pay, unemployment benefits, freelance income, and capital gains, to name a few. In the event you win the lottery or a sweepstakes contest, this is also considered taxable income.
Non-taxable income is considered non-taxable in the eyes of the IRS. You would not be expected to pay taxes on a health savings account (HSA), child support payments, workers compensation payments, disability benefits (if you paid the premiums for the policy), inherited assets, capital gains on the sale of your primary residence, earned income in eight states, or life insurance payouts (if you are the beneficiary).
It is also possible that some Social Security benefits, depending on your income, may also be considered non-taxable.
Maximizing Non-Taxable Income
Now that you know the difference between taxable and non-taxable income, you’re probably wondering what some of the best ways are to maximize non-taxable income. Here’s a shortlist of money moves to start making.
Open an HSA.
Those with high-deductible healthcare plans can lower their tax bill by opening an HSA. This account may be opened by you or your employer and used to plan for the unexpected, like future medical costs, or as a retirement account.
An HSA uses pre-tax dollars, so this account grows tax-free. If your employer contributes to your HSA, their contributions are usually tax-free too. Plus, if you leave your job, you can take your HSA with you.
Open a Roth IRA.
Another way to maximize your non-taxable income is to open a tax-advantaged retirement savings account, like a Roth IRA. There are several benefits to opening a Roth IRA, including the ability to make tax-free withdrawals in retirement and enjoy tax-free earnings in your account.
You can also continue making contributions to a Roth IRA as long as you’re earning money and pass your wealth onto any heirs tax-free.
Move to a state without individual income tax
Earlier, we mentioned that there are eight states where you would not be expected to pay individual income taxes. These states are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Consider moving to one of these states, but keep in mind that if you do plan to move, you’ll still need to meet your tax obligations with the state you are moving from.
Sell your primary residence
According to TurboTax, taxable income does not include capital gains on the sale of your primary residence. This is a house you’ve owned for at least two years and lived in as your primary residence for two of the five years prior to the sale.
Be aware, however, that this gain is tax-exempt, except to the extent it exceeds $250,000 if you’re a single taxpayer or $500,000 if you’re married and filing jointly. There are also certain restrictions the IRS will need you to be mindful of, such as whether your home has ever been used as a rental property or home office.
Source: GoBankingRates