Ten types of retirement income that are not taxed
Most of the income you receive after retirement, even if it's not direct income from work, can still be taxed. But not all of this is subject to federal taxes, especially if you play your cards right. Edition MSN tell you which types of retirement income you can avoid paying tax on.
1. Quarantine financial assistance
The first two rounds of coronavirus payments authorized by federal laws enacted in 2020, and the third round of payments authorized in March 2021, are not taxable income for the purposes of the Internal Revenue Service (IRS).
2. Social security benefits
If your "total income" is below a certain amount, it will generally not be taxed.
The exact amount depends on whether you file your tax return as an unmarried individual, together with your spouse, or separately from your spouse.
3. Top up your Health Savings Account (HSA)
Medical savings accounts are popular precisely because of their tax advantages. Your HSA contributions are tax-deductible and withdrawals are tax-free if used to pay qualifying medical expenses.
Therefore, you will never pay federal taxes on the money you put into an HSA, as long as you follow the IRS rules for that type of account.
4. Cancellation of mortgage payments
Reverse mortgage payments are tax deductible. The federal agency considers them borrowed funds, not income.
Whether you receive these payments as a lump sum, a monthly advance, a line of credit, or all three, you will not pay federal income tax.
5. Roth IRA Retirement Account
One advantage of a Roth Individual Retirement Account (IRA) over a traditional IRA is that distributions are tax-free.
The benefits you receive, for example, at or after age 59,5, are generally among those that can be considered “qualified”.
This does not mean that you completely avoid taxes.
One of the ways Roth IRA deposits differ from traditional IRA deposits is that you pay federal income tax on them for the tax year you made the money, not the year you withdraw money for. You pay for the upfront, not the backend.
This often makes Roth reports attractive to people who want to avoid taxation at retirement and to those who expect to be in a higher tax bracket during retirement than during their working years.
6. Income from life insurance
According to the IRS, income from a life insurance policy that you receive in connection with the death of an insured person is generally not considered taxable income. You don't even have to report income on federal tax returns. But any interest is taxable.
7. Interest on municipal bonds
Municipal bonds are essentially loans to state or local governments, and it would be horribly rude for the federal government to tax you on any interest you earn on such loans.
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This does not mean that municipal bond interest is completely tax-free. You may end up paying in other ways.
For example, your income from interest on municipal bonds may increase your total income so much that you will have to pay taxes.
8. Making a profit from the sale of the house
Capital gains from the sale of your primary home may not be subject to federal income tax, depending on how much you earn.
"You may qualify for an exemption of up to $250 of these profits from your income or up to $000 of these profits if you file a joint return with your spouse," the IRS said in a statement.
Qualifying for this tax credit includes owning a property and using it as a primary home for at least two of the five years prior to the sale of the home.
9. Veterans Benefits
A wide range of benefits paid through the US Department of Veterans Affairs (VA) do not count as income.
These payments include:
- disability compensation and disability pensions, which are paid to veterans or their families;
- veterans insurance payments and dividends paid to veterans or their beneficiaries;
- interest on insurance dividends left on deposit in the VA.
10. Reimbursements and Volunteer Costs
Certain types of funds you receive in connection with federal volunteer work are not subject to federal taxes.
As stated in IRS Publication 525, these include various compensations to volunteers in:
- Service Corps of Retired Executives (SCORE);
- Senior National Corps programs;
- Senior Tax Advisory Program.
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