The IRS Cannot Tax These Types of Income

To avoid IRS problems like a smart taxpayer, you understand you shouldn't be paying less or more of what you owe the IRS in taxes. The government can't legally collect taxes on particular income types, and not many taxpayers realize this.

Since tax law does not allow it, the IRS can't tax particular types of income. Being aware of what the IRS can't tax can help you keep your money, but you should do it correctly to avoid tax issues.

One of these types of income is tax-free interest. This is income earned from instruments like state-issued bonds, or any other political entity that is entitled to freedom from federal taxes. Municipal bonds is the common name for these types of investment instruments, and the value of their tax benefit essentially increases when your marginal tax rate goes up. Basically, if your overall income goes up, the value of the bonds increases in parallel.

Making money from a car pool is another income that can't be taxed. You can exclude your car pool profits without IRS issues.

Another source of income that is excluded from taxes is selling your home. If you sell your home, you can exclude up to $250,000 in profits, $500,000 if you file a joint return with your spouse. This exclusion can be claimed every two years. If you sell your home after less than two years, you can also claim a partial exclusion. There are various restrictions, so it is best to consult a tax professional to make sure that you're doing this correctly.

Having an increased paycheck amount is not the only way of getting a raise. Your employer can cover the cost of a higher healthcare policy or a better insurance option instead, if you prefer. You won't need to deal with possible IRS issues because the IRS will not be able to tax your raise.