Do not overpay taxes on income that is protected by the U.S. tax code. Here are the major categories to watch, including five types of raises that do not add a dime to your taxable income.
Want to keep the tax man away from your money? It is easier than you think. There are lots of ways to increase your wealth without having a chunk gobbled up by the IRS. It is not that the agency does not want your money. It is just that the tax law prohibits the IRS from touching it. And with a bit of planning, you can start to cut your current tax bill and put money in your pocket now. Here is a look at a few examples.
Tax-free interest
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.)
Assume you are in the 35{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788} bracket, the top rate through the year 2010. A 5{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788} tax-free rate becomes the equivalent of a taxable rate of 7.69{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788}. In the 15{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788} bracket, the taxable equivalent is only 5.88{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788}. Some bonds may not only be tax-free at the federal level, they may also escape state and local taxes. If you are in the top brackets and live in New York City, this is one investment you definitely want to consider for your portfolio.
Car-pool receipts
Commuting to work? Bring a friend — and his wallet. If you form a carpool to carry passengers to and from work, any dollars received from these passengers are not included in your income.
Commuting costs are generally not deductible. But if you establish a carpool and you are reimbursed in amounts sufficient to cover the cost of your repairs, gas and similar items used in connection with operating your car to and from work, then you have converted personal nondeductible expenses into excludable income.
Assume you are in the 25{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788} bracket for 2008 and 2009. You have to earn $133 per month to cover a $100 monthly commuting expense. If you have a carpool arrangement with expenses being reimbursed, you have got no additional income. But you do have an additional $133 per month in wealth!
Sell your house
Under a tax law enacted in 1997, 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. You do not have to reinvest the money, and you can claim the exclusion every two years. (If you have got $500,000 in gain every two years, I want to meet your real estate agent and go shopping!)
If you do not meet the two-year rule, you can get a partial exclusion based on the time of use and ownership. Assume you sold after only one year and had a $50,000 profit. Your exclusion is half the $250,000, not half the $50,000 profit. In this case, you would pay zero tax on the sale. But 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 have not yet seen final regulations defining “unforeseen circumstances.” My understanding is that the IRS is going to be flexible here.
Tax-free compensation
When you are due for a raise, ask your company to get creative in your compensation. There are numerous ways to receive non-taxable compensation. Here is a look at some of the best alternatives to taxable earned income.
Use your health coverage.
Health and hospitalization insurance premiums paid by your current or former employer are tax-free — a huge benefit. Let us say your health insurance premiums come to $280 a month or $3,360 a year (for an HMO policy for a family of four with a $1,500 deductible). If you are in the 25{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788} tax bracket and have to pick up the bill, the real cost to you would be $4,480. That is $3,360 for the premiums and $1,120 for additional income taxes because you will be paying for the coverage in after-tax dollars. Having your company pick up the cost helps both of you. It does not 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{b922f8cefff31631deb29509dd0146200d12f58f2292deeff3107b9a333ca788} payroll taxes on the premiums. And you, of course, boost your disposable income substantially.
Cover your life.
Group term life insurance coverage of $50,000 or less paid for by your company is not 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.
Send yourself to school.
Get educated. The courses do not even have to be job-related. But they cannot 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.
Get you there…and parked.
Your company can give you discount fare cards, passes or tokens to take public transportation to work. As long as it is 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 are taxed only on any excess over the $100. 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.
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.
Cash Gifting – Achieve Abundant Wealth Today
If you research online, you are going to find that there is really nothing saying that cash gifting is illegal. Most of the time it is people expressing their own personal opinions, not facts. And after years of experience and thorough research, no one has been able to show me the law in black and white stating that giving a cash gift is illegal.
As a matter of fact, I learned that both American and Canadian citizens have the Constitutional right to gift property, cash and other assets. Many other countries participating in cash gifting also have very similar gifting laws.
In the United States we have the Preamble, the Constitution and the Bill of Rights to protect a private citizen’s rights to earn, pay taxes and give away property and cash as long as it is done according to the laws and codes of this country. The U.S. gifting rules are found in the IRS Tax Code, Title 26, Sections 2501-2504 and 2511.
In 2008, in the United States of America, the law states that one or more individuals can give a cash gift to another individual of up to $12,000 each per calendar year without any tax liability to either the giver or receiver of the gift, because the tax on the gift has already been paid.
I have also found that most well organized cash gifting programs, like Achieve Abundant Wealth Today, require each participant to use some form of a Gifting Statement and/or Non-Solicitation Form, which when signed, become binding agreements between two private individuals. It is said, these forms are used to ensure the longevity and legality of a gifting program.
So giving a gift of cash to someone, be it a friend, family member or a stranger, is legal according to IRS code. Again, there is no specific nation-wide law that I have been able to find to say that cash gifting is not legal.
With that being said, it is important to note that not all cash gifting programs may be legal in their structure. Certainly there are some that may not be. Unfortunately, there are still some old school cash gifting programs out there (mostly offline) that were not structured properly in order to sustain their efforts for any considerable length of time, and some of them use an illegal pyramidal type of structure.
Consequently, many of these types of mostly offline programs in the past were closed by the federal government because of this illegal ever-widening base pyramid structure and gave cash gifting a bad reputation.
However, in recent years, with the creation and development of the linear structure, things have changed and more and more people are benefiting through the use of these types of programs, like Achieve Abundant Wealth Today, than with any other cash gifting structure in the World.
For more information about Achieve Abundant Wealth Today, go to:
http://www.achieveabundantwealthtoday.com
You get the idea. Any time you can convert taxable income into non-taxable income, you have given yourself a raise. And when both you and your company save money, it is a win-win for everybody.
Get creative…in most cases you are paying for the items anyway, and on an after-tax basis. It is really relatively simple.