Strategies For Tax Free Income | USTaxAid

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Strategies For Tax Free Income

Written by Diane Kennedy, CPA on January 7, 2022

There are still some ways that you can earn tax-free income. Here are some popular ways that are still available. 

Tax-free capital gains and dividends

If you are at the right tax bracket, the tax rate on long-term capital gains & dividends is still 0%.

For 2022, that could be $109,250 if you are married with 2 dependent children. Your own income level will likely vary, based on your own circumstances. But don’t discount the possibility that you could actually pay 0% tax.

If you itemize deductions, your AGI (adjusted gross income), including long-term gains and dividends, could be even higher, and you would still be within the 0% bracket for those gains and dividends.

Capital gains that are offset by capital losses are tax-free

When you incur capital losses during the year and/or have a capital loss carryover from a prior year, you can offset those losses against your capital gains.  If you still have excess capital loss after that offset, you can take another $3,000 of capital loss against your other income.  

Tax-free withdrawals from Coverdell Education Savings Accounts (CESAs)

You can contribute up to $2,000 annually to a Coverdell Education Savings Account (CESA) set up for a beneficiary (typically your child or grandchild) who has not yet reached age 18. A CESA is an account set up by a “responsible person” for a designated beneficiary. It is used exclusively as an education savings vehicle.

CESA earnings are tax free and accumulate in the accounts.  Then tax-free withdrawals can be taken to pay for the beneficiary’s college tuition, fees, books, supplies, and room and board. If you have several beneficiaries in mind, you can contribute up to $2,000 annually to separate CESAs set up for each one.

Tax-free withdrawals from Section 529 college savings plans

Section 529 college savings plan accounts also allow for tax-free earnings. These can be used to cover a college expenses, and thanks to recent changes even costs for education before college age. Also watch for state tax breaks, including tax credits from some states.

Tax-free treatment for appreciated inherited capital gain assets

If you inherit a capital gain asset like stock shares or real property, the tax basis of the asset is stepped up to its full market value.  So, if you sell the inherited asset, you won’t owe any federal capital gains tax except on appreciation that occurs after the date of death. 

Tax-deferred Section 1031 real estate exchanges

A Section 1031 real estate exchange allows you to roll over basis from a property you sell. You don’t pay tax on the sale and instead push that gain off until a future sale. Tax-deferred is tax later. And planned right, sometimes tax later turns into tax never.

These are just some of the possible tax-free and tax-deferred strategies you can use to pay a whole lot in taxes. 


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