Paying income tax has never been a very comfortable thing for most of us and at some point of time, all of us have honestly imagined that how we can get rid of this burden off our back. In United States, there are several government aided income tax exemption plans which can help you to save more money for the future and enjoy a much secured and better retired life.
Let’s take a look into each of those income tax exemption options that can help us to get a tax free income in the long run.
Tax exemption on profits earned from selling houses
This is a very good source of earning a tax free income wherein an unmarried seller of the house can get a tax exemption of up to $250,000 on the profit gained from the proceeds of the house sale, provided he owns the property as well as uses it as his principal residence for 2 years within a period of 5 years ending on the sale date.
There is a similar arrangement for married couples who can jointly get a tax exemption of around $ 500,000 on the sale proceeds from a house with some applied conditions such as, at least one of the spouses must have ownership to the property for 2 years and both of them should have used it as their principal residence for the same duration during a 5 year period ending on the sale date.
Taxes And Rules
However, there is one exception to the above rule and that is in case if you are unmarried and have not opted for any kind of tax exemption on any previous house sale, then you need to wait for another 2 years to avail this benefit and if you are married then you will be entitled for the tax exemption benefit for the above mentioned amount if neither you nor your spouse have claimed for any kind of exemption on the earlier sale of any of your houses.
Prorated tax exemption
If you do not qualify for a larger tax exemption from home sale gains on account of not being able to meet the above criteria, chances are you might still be eligible for a tax exemption in case if you had to sell your house on medical grounds, job loss or in the event of such other unfortunate instances as approved by IRS.
In case of a joint filing by a married couple, the exclusion of taxes would be for $250,000 instead of $500,000 in the event if either of the spouse has used the house as the principal residence just for one year prior to selling the house for health reasons.
Availing tax free Individual Retirement accounts
This is again a great way to earn tax free income by investing in tax advantaged retirement accounts such as 401(k) and individual retirement accounts or IRAs.
One of the primary advantages of an IRA is that it helps you to withdraw your invested amount without paying any taxes or incurring a penalty. However, to qualify for this tax advantaged facility you need to be 59 ½ years or more and you must possess one IRA account kept active for at least 5 years.
Additionally, unlike a traditional IRA, wherein you have to withdraw your distributed income once you have attained an age of 70 1/2 years or above; you are not forced to take the minimum distributed income in case of a Roth IRA without the fear of facing any penalty.
You can leave the amount in an IRA account untouched for as long as you want without being bothered.
Contributions to IRA account
You have to keep in mind that the contributions that you make towards your IRA account are not tax deductible.
Hence, care must be taken to ensure that the money contributed towards your IRA account must be less than your earned income for that year or less than the annual contribution limit on IRA for that particular year.
If your contributions exceed the annual limit, then the additional amount will be subject to taxation or a penalty.
If there is a possibility of an increased income in near future then you would not qualify for contribution eligibility over time and the best way to avoid this situation would be to then convert your traditional IRA account into a Roth IRA account to get the maximum benefit.
Since more conversion contributions means depositing larger sum of money into Roth IRA; it also indicates that larger conversion may lead to more amount of money getting taxed.
Hence, under all possibilities, the best thing would be to consult your tax adviser to help you take the right decision for conversion of the IRA accounts to enjoy maximum tax benefits.