Friday, March 25, 2011

Eighteen Ways To Get Tax-Free Income

A two-year tax cut extension? That compromise between Congress and the president was nice, but you can do better. You can get a 0% tax rate on many kinds of income.
It’s pretty hard to avoid paying taxes on your paycheck. But there are all kinds of ways to pick up money that the Internal Revenue Service can’t touch—such as from inheritances, fringe benefits, airline miles and rebates.

Remodel
Sweat equity is tax free, if you know what you’re doing. Buy a fixer-upper and live in it for at least two years. If you’re talented at painting and carpentry, you’ll make a nice profit when you sell, and you can take advantage of the $500,000 exemption on capital gains for your principal home. For singles, the exemption is $250,000.
Moonlight
The first couple of thousand dollars a year you pocket from outside jobs is likely to be tax free. Reason: You probably have all sorts of expenses, such as for continuing education, a home office, professional association dues and a computer, that you can write off against freelance income.  Since these are expenses that you usually can’t otherwise deduct, your early freelance dollars are pure gravy.
Get reimbursed
Ask your employer to cover more of your work expenses (like those professional dues) in lieu of giving you a raise. So long as your expenses are documented, the reimbursement is not income to you. Your company will save on payroll taxes, too. But don’t mess with country-club dues; these aren’t deductible.
Earn airline miles
If you pick these up by taking deductible business trips and then use them on a vacation, they should, in principle, be taxable. But they aren’t. This is a political hot potato, and the IRS gives frequent fliers a free ride.
Take the bus
You can pull up to $230 a month out of your paycheck, pretax, to cover mass transit, vanpooling and commuter parking.
Hustle rebates
Those grocery-store coupons may not be worth your time. But the $50 rebates you get on phones and computers definitely are. As a reduction in the cost of an item for personal use, a rebate is not considered taxable income.
Be nice to Uncle Joe
If he leaves you money in his will, you don’t owe a dime of income tax on it.
Pay off credit cards
Where else are you going to earn 18% on your money? To top it off, this 18% dividend is totally tax free.
Rent your house out
If you rent out a house for 14 or fewer days, the income is scot-free. Not only that, you don’t have to prorate or reduce your otherwise deductible mortgage interest and property taxes. Unlike the remodeling gambit, this one works on vacation homes, too.
House sit
You get a rent-free place to stay by keeping watch in a house whose owner is off on an overseas assignment. The $20,000 you save on rent is like getting a $20,000 raise, except that it’s tax free.
Get a cash-back card
The best of the breed give you 2% back, and the rebate is tax free if the charge was for a personal purchase. For more, read this.

Be a good neighbor
You babysit the neighbor’s children, and in return he paints your garage. You’re both earning money, in effect, by providing services. While the IRS can assess taxes on people in barter exchanges that involve account books and transactions with strangers, there’s no way to levy a tax on helping out a friend.
Have a charity tag sale
You were going to send $500 to Doctors Without Borders anyway. Do it this way. Have a tag sale, unloading tchotchkes from your attic, and advertise that 100% of the proceeds will go to the worthy cause. If you haul in $490, that sum becomes, in effect, tax free income for your day of labor.
Own a house
You get a dividend in the form of not having to pay rent. This dividend is tax free. It has nothing to do with mortgage interest. You have a tax free dividend even if you pay cash for the home.
Take up plumbing
…or electricity or carpentry or car repair. When you work overtime at your company in order to have the bucks to pay pros to do various chores, you owe taxes. But when you hire yourself to do chores, there’s no income to tax.
Set up an HSA
In combination with a high-deductible health insurance policy for your family, you set up a health savings account and put $6,150 a year ($7,150 if you’re over 55) of tax-deductible money into it.
You can use the bucks right away to pay uncovered medical costs. But you don’t have to eat into the account in this fashion. Instead, pay your doctor bills out of your checking account. Then let the $6,150 compound tax free until you are retired.
If you use the HSA later in life for medical costs (which will be considerable; Medicare is going bankrupt) then both the principal and the earnings come out tax free.
Hire the kids
If you own your own business, make your teenage children into employees. If the pay is reasonable for what they do, you can deduct the payroll, lowering your high-bracket net income. On the receiving end a child laborer owes no federal income tax on earned income below the $5,700 standard deduction.
If the kid also has investment income, the exact value of the freebie gets more complicated. But, in round numbers, $5,000 of summer job income is going to be free of income tax.
You will, however, have to cough up for Social Security and Medicare taxes.
Get paid in lodging
If part of your compensation is a free apartment, and if your presence on the premises has a business purpose, then you don’t owe tax on the benefit. This works for hotel managers, apartment supes and roustabouts on offshore rigs.
Clergy members get a better deal: Their housing allowance is tax-free even if paid in cash.