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What are Some Types of Tax Free Income?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 20 September 2016
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Tax free income in any country will be based on that country’s laws. Finding out which types of income may be earned or considered tax free is important when trying to reduce tax payments. A good accountant may be able to provide this information, but many also turn to websites offered by the tax collecting agencies within a country, or the various publications about taxation rules that can be ordered over the phone. When discussing types of income that may be considered tax free, it’s always a good idea to verify that these laws apply within a country in which a person lives.

Generally, there are certain types of tax free income. First, amount of taxable income can be reduced by standard deductions allowed by countries. Additional income that people may not have to pay taxes on includes deductions for various government social programs. For instance in the US, payments made to things like social security and to pay state taxes tend to reduce the amount of income considered taxable.

Other forms of income that might be tax exempt include money placed in flexible spending accounts or that is paid to obtain things like health coverage. Income used for legitimate business expenses or to maintain a home office may also be tax free. Donations to charities can reduce amount of taxable income too.

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Savvy investors can earn some tax free income by investing in certain types of stocks or bonds that are usually offered by government sources. The returns on these investments may be exempt from taxes. Though lower rate of return than other investments may be common, the difference in not paying taxes on any interest or profits can help.

Additional sources of tax free income can include things like capital gains when selling primary residences. This rule does not apply in all countries, but a certain amount of profit made on a primary residence can be exempt from taxes. Some forms of inheritance may be free of taxes too. If people place items to be inherited in trusts, those who inherit them may not owe taxes, though higher amounts could incur taxes.

A few other forms of tax free income are things like damages from lawsuits and payments to beneficiaries of life insurance. Certain types of government support can be free of tax. Payments in the US of supplemental security income (SSI) are free of taxes. However social security income, which is collected usually when people retire, may be taxable provided it falls into certain amounts. Another source of income that is tax exempt may be cash gifts.

One issue in discussing tax free income is the amount of income people make. In progressive tax systems, higher amounts of money made tend to mean people pay more in taxes. Theoretically, those who make very little money may not pay much in taxes because their income falls in certain non-taxable levels. Sometimes, income is judged tax-free not by its specific source but by the total amount earned by a person. This fact is important to recognize for those who live in countries that have a progressive tax system, as in some cases all money earned may be tax free.

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