Years ago I started a book project called The Zero Percent Tax Bracket. The idea was to write a book with all the ways a person can bring in money and legally not report it as taxable income. As I started pulling information together it became clear marketing such a book would be difficult. Since I was not focusing on tax protesting or other such BS it would not attract the wing nut crowd nor was I interested in becoming the next Charles Givens. A book called The Zero Percent Tax Bracket would probably languish on the back shelf of a bookstore with only modest sales. The idea was sound but I did not like the marketing plan.

Today I am resurrecting the idea. As a book it would need a serious shove to turn a profit for the publisher; as a series of blog posts it is an excellent way to outline all the ways to line your pocket without owing a penny in tax. You will not find all of these tax-free methods listed in the tax code. It is the unusual interpretation of tax law that always appeals to me as long as jail time is not involved. (Jail time might be okay if it is a fairly short stint of three-hots-and-a-cot, plus free healthcare at the expense of the taxpayers. Taxes are no fun, but collecting benefits—even free jail lodging—does.)

    • IMG_20160817_103450Foster care stipends: When Mrs. Accountant and I first married we sat down and made a list of things we would like to do at least once. Having foster children was on that list. We wanted to have foster kids before we had our own out of concerns it could affect our own children. For three years we accepted high school age foster children. Many foster parents want infants and young children; not us, we wanted the toughest cases. Two foster children were with us a year or more with two more children for a shorter time. The stipend back in 1990 was $1,000 per month, per child and it was tax-free. The stipend is there to defray the costs of having a foster child in your home. There was a shortage of foster homes for high school aged children so the pay was high compared to $300 a month for an infant. It wasn’t about the money; I didn’t want to take care of a crying baby. Our foster children were introduced to Tony Robbins’s Personal Power program and educated in personal finance issues. The goal was to give our foster kids the tools necessary to build a quality life. A few years ago one of our foster kids stopped in the office to show me how he put the knowledge we shared with him to work. He is married, employed, and living the dream.
    • Credit card bonuses and rewards: This is one of the best deals going. Credit card companies are killing themselves to get you to open an account. Bonuses are frequently worth $500 or more in cash, plus points on all purchases of up to 5%, redeemable for cash or travel. Points are often more valuable when used toward travel rewards. Personally, I like cash; there are other ways to get cheap or free travel. The high bonus cards generally require $3,000 – $4,000 in spending in the first three months to earn the bonus. Small business owners and landlords should have no problem meeting bonus spending levels. Planning a large purchase with credit card bonuses can get you 20% or more back on your purchase. And it is all tax-free. The IRS considers it a return of your own money, as if it was from a discounted price or rebate. Manufactured spending can turn credit card bonuses and rewards into a modest living. (Manufactured spending will be the discussion of a future post.)
  • Disability insurance benefits: For disability insurance benefits to be tax-free you need to pay for the premiums with after-tax dollars. If your employer provides the benefit at no cost to you then the benefits are It might be a good idea to pay your own disability insurance premiums. Worker’s Compensation benefits are always tax-free; so are most benefits from an auto policy covering injury claims. (Punitive damages are taxable.)
  • Sale of personal residence: Years ago the tax code allowed gains on the sale of a primary residence to be rolled into the next residence without tax consequences. As long as you kept buying a more expensive home you never paid tax on the gain. At age 55 you could take a one-time $125,000 gain tax-free and keep rolling the rest of the gains to the next home. That and Form 2119 are now gone. (It is bad enough I know so much about tax code the way it is without remembering tax laws from over a decade ago. Senior moments become a blessed relief for old accountants.) Now it is easier to take tax-free gains from your home. The sale of a primary residence gets a $250,000 exclusion ($500,000 for most married couples) if you lived there 2 of the last 5 years. Even though it is possible to have two primary residences qualify in the same tax year, the exclusion can only be taken once per tax year. Planning tip: There is nothing wrong with buying a fixer-upper, moving in, and working on the property for two years and selling it for a sizable tax-free gain. I have a few clients (emphasis on few) who have done just that. They buy a home and work on it as their job. Two or three years later they cash a nice check and repeat. If you don’t mind the lifestyle it is a way to live large while sticking it to Uncle Sam.
  • Loans: Loans are not taxable events! Clients always know loan proceeds are never added to income, but sometimes forget the payments are not deductible either (except for interest in certain cases). Because loan proceeds are never included in income the tax code offers ways to put money in your pocket without paying income tax. Loans from 401(k) plans, for example, are tax-free. You do need to pay the loan back and if employment is terminated the loan is due in full at that time or taxable. Insurance companies understand well the value of tax-free loans. I am not a big fan of insurance products, but there are a few select situations where they make sense, even with the high fees. If you own a non-qualified annuity or universal life policy there could be planning opportunities for tax-free money and you never have to pay it back. Talk with a qualified accountant.
  • Foreign income exclusion:S. citizens working abroad are allowed to exclude from income up to $100,800 of foreign earned income, including certain foreign housing costs. The rules are complex so I will not take time here to list details. You may still owe tax in the foreign country. I recommend a qualified tax professional help you with filing your tax return if you have foreign income. The biggest problem is finding a qualified tax professional. I get close to 1,000 requests per year for tax services from ex-pats. Unfortunately I no longer accept ex-pats as new clients. My office is small and we don’t have the room. If you are a tax professional looking to grow your business fast and love working with Americans living and/or working abroad and are comfortable with the foreign income exclusion, contact me. We need to build a business relationship where I send you lots of wonderful new clients.
  • Life insurance benefits: The death benefit from a life insurance policy is income tax free. There could be estate tax issues to consider.
  • Gifts: Gifts from anyone in any amount are tax-free. The person giving the gift may have to file a gift tax return and pay a gift tax, but the receiver of a gift has no reporting requirements and does not report it as income.
  • 51qj2Oj3XUL._SX331_BO1,204,203,200_Roth IRA:Roth IRA gains are always tax-free if you follow a few simple rules! There seems to be significant confusion on this issues if people take the money out before age 59 ½. Let me clear it up. You can take money out of your Roth IRA at any age without income tax! If you take money out before age 59 ½ you could face a 10% penalty and tax unless you follow a few simple rules. Your original money (basis) has already been taxed, comes out first, and suffers no additional income tax or Once you have withdrawn your entire basis, the gains are subject to penalty and tax if the withdrawal is before age 59 ½ and it is not for an excluded item. Think about this for a second. You should fill your Roth IRA to the hilt every year regardless your financial or tax situation (there are a few reasons I would not fill a Roth IRA, but I digress). You can take your original money (basis) out at any time. Earnings distributed before age 59 ½ and before the account is five years old are subject to tax and penalty unless you qualify for an exception (used for a first time home purchase ($10,000 lifetime max), for qualifies education expenses, you become disabled or pass away, used for unreimbursed medical expenses or health insurance if unemployed, or part of a substantially equal periodic payments.) The larger the Roth IRA balance the more you can access with a substantially equal periodic payment. I will write a more in-depth post on IRA distributions in the future to flesh out the details.
  • Health savings accounts: I call these things super Roth’s. You get a deduction and tax-free gains. Where you going to get a better deal than that? HSAs are not for everyone. People with significant medical issues or high prescription costs will not benefit from an HSA in many cases. As always, talk to a friendly, and I might add competent, tax professional.

The tax-free income ideas here deserve more fleshing out. Rather than provide an info-dump I wanted to share the strategies so you can dig further on your own or at least ask great questions of your accountant. There are hundreds of other ways to load the First National Bank of Wallet with tax-free income. Some of the most common I listed above. I’ll share more ideas in future posts with a full fleshing out of some strategies in separate posts. I get too wordy at times, so I did not want to lose you before I helped you load your pockets before you left the room.