Pay no tax with these 10 Strategies

Terrance Hutchins |



Break # 1: Tax-Free Income Accumulation and Withdrawals with Roth IRAs


Roth IRAs have two big tax advantages. First they offer qualified  withdrawals that are federal income tax free and generally state income tax free. A qualified withdrawal comes when you meet the following 2 requirements: You’ve had at least one Roth IRA open for over 5 years and you have reached the age 59.5, are disabled or deceased(after death your heirs can take tax-free withdrawals with proper planning).


Second a Roth is exempt from Required minimum distributions(RMDs). Unlike with a traditional account the Roth does not require you to make withdrawals after the age 72. You can leave the Roth to grow tax free as long as you want. 


You can fund a Roth in two ways. 

  • Make an annual Roth contribution through your IRA or 401K(if offered). The Roth is a way to guarantee the tax you pay on your savings. The absolute maximum amount you can contribute for any tax year to a Roth IRA is the lesser of (a) your earned income for that year or (b) the annual contribution limit for that year.


Basically, earned income means wage and salary income (including bonuses), self-employment income, and alimony received under a pre-2019 divorce decree.


For your 2022 tax year, the Roth contribution limit is $6,000 (or $7,000 if you’ll be age 50 or older on December 31, 2022). This assumes you’re unaffected by the AGI-based phaseout rule explained immediately below.


For your 2022 tax year, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $129,000 and $144,000 for unmarried individuals. For married joint-filers, the 2022 phaseout range is between joint MAGI of $204,000 and $214,000.


The Roth 401K doesn’t have an income limit but it does have a wager deferral limit of $20,500 per year. Depending on your plan design you may also be eligible to contribute up to $61K(minus the employer match) into the Roth 401K.

  • Do a Roth conversion

You can convert your traditional IRA account into a Roth IRA account while electing to pay the tax on the converted amount in the year of the conversion. This can be a powerful tool in a lower income year or a down market year.


Break # 2: Tax-Free Social Security Benefits


While most folks are taxed on between 50 percent and 85 percent of their Social Security benefits, individuals with modest incomes can receive a bigger percentage federal-income-tax-free—potentially up to 100 percent.


If you’re unmarried with provisional income below $25,000, 100 percent of your benefits are tax-free. With provisional income between $25,000 and $34,000, you’ll be taxed on up to 50 percent of your benefits. With provisional income above $34,000, you could be taxed on up to 85 percent of your benefits.

If you’re a married joint-filer with provisional income below $32,000, 100 percent of your benefits are tax-free. With provisional income between $32,000 and $44,000, you’ll be taxed on up to 50 percent of your benefits. With provisional income above $44,000, you could be taxed on up to 85 percent of your benefits.


“Provisional income” means your adjusted gross income (AGI) from page 1 of Form 1040, plus half of your Social Security benefits, plus any non-taxable interest income (typically from municipal bonds).


AGI equals the sum of your taxable income items reduced by the sum of your so-called above-the-line deductions for such things as deductible contributions to a traditional IRA, self-employed retirement plan contributions, self-employed health insurance premiums, the deductible portion of self-employment tax, and alimony payments made under a pre-2019 divorce agreement.


The point is, at least 15 percent of your Social Security benefits will be federal-income-tax-free—and maybe more, potentially up to 100 percent, depending on your provisional income. As a bonus, some states exempt all or part of your Social Security benefits from state income taxes. For example, Colorado exempts the first $24,000 from state income tax.


You might be wondering why Social Security taxable in the first place but that was part of Congress’s attempt to keep the system alive.


Break # 3: Tax-Free IRA Withdrawals on Top of Tax-Free Social Security


As we just reviewed, between 50 percent and 100 percent of Social Security benefits can be tax-free for folks with modest incomes. If you are in that category, you might also have some otherwise taxable withdrawals taken from your traditional IRA.


Good news: you can shelter all or part of those withdrawals from federal income tax with your standard deduction.


For 2022, the basic standard deductions amounts are


· $12,950 (single),

· $19,400 (head of household), and

 · $25,900 (married, filing jointly).


If you’re age 65 or older as of year-end, the standard deduction amounts are a bit higher(an additional $1350)


The point is, a good chunk (or maybe all) of your Social Security benefits might be federal-income-tax-free.


Break #4: Tax-Free Home Sale Gains

In one of the best tax-saving deals ever, an unmarried seller of a principal residence can exclude (that is, pay no federal income tax on) up to $250,000 of gain, and a married joint-filing couple can exclude up to $500,000 of gain.



After the huge surge in residential real estate prices, which may not be over, this break can be more valuable than ever. Naturally, there are some limitations. You must pass the following four tests to qualify.


1.     Ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.

2.     Use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use need not overlap.)

3.     Joint-filer test. To be eligible for the larger $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test.

4.     Previous sale test. If you excluded gain from an earlier principal residence sale, you generally must wait at least two years before taking advantage of the gain exclusion deal again. If you’re a married joint-filer, the larger $500,000 exclusion is available only if neither you nor your spouse claimed the exclusion privilege for an earlier sale within two years of the later sale.


Prorated Exclusion


If you don’t qualify for the maximum $250,000/$500,000 gain exclusion due to failure to pass all the preceding tests, you may still qualify for a prorated (reduced) exclusion if you had to sell your home for job-related or health reasons or for certain other IRS-approved reasons.


For instance, say you’re a married joint-filer. You and your spouse used a home as your principal residence for only one year before having to move for job-related reasons. You qualify for a prorated exclusion of $250,000 (half the $500,000 maximum allowance for a joint-filing couple, based on passing the ownership and use tests for only one year instead of two years).


Break # 5: Tax-Free Capital Gains and Dividends


If your income is below the following thresholds you can receive capital gains and dividends at the 0% tax rate.


  • $109,250 MFJ
  • $75,200 Head of Household
  • $54,625 Single

If you itemize deductions you can add the schedule A deductions that exceed your standard deduction to these income amounts. As long as your income doesn’t exceed the total you can receive the income tax free.


Break # 6: Capital Gains Sheltered with Capital Losses Are Tax-Free


If you have a current-year net capital loss and/or a capital loss carryover into this year, you can use it to shelter capital gains plus up to $3,000 of income from other sources (salary, self-employment income, interest income, whatever).


You can carry over any unused net capital loss into next year to shelter gains and income in 2023 and beyond.


Break # 7:  Tax-Free Treatment for Inherited Capital Gain Asset

If you inherit a capital gain asset, such as stock or mutual fund shares or real estate, the federal-income-tax basis of the asset is stepped up to its fair market value as of the date of your benefactor’s demise (or six months after that date, if the estate executor so chooses).


So, if you sell the inherited asset, you won’t owe any federal capital gains tax except on appreciation that occurs after the inherited date. This is commonly known as the “step up in basis”.


Break #8: Tax-Free Section 1031 Real Estate Exchanges

Ok this is not technically tax free(it’s actually tax deferred) but 10 strategies sounded better than 9.  Section 1031 of theInternal Revenue Code allows you to postpone the federal income tax bill from unloading appreciated real property by arranging for a Section 1031 exchange, also known as a “like-kind exchange.” This is one big reason that some real estate investors have continued to build their wealth over the years while keeping Uncle Sam at bays.


Here’s the big tax-saving bonus: If you pass away while still owning real property that you’ve acquired in a Section 1031 exchange, the tax basis of the property is stepped up to fair market value as explained immediately above. Thus, now, the 1031 deferred gain turns into a tax-free gain(explained above).


Break #9: Tax-Free Small Business Stock Gains


Qualified small business corporations (QSBCs) are a special category of corporation, the stock of which can potentially qualify for federal-income-tax-free treatment when you sell for a gain.


As the tax law currently stands, QSBC shares issued after September 27, 2010, are eligible for a 100 percent gain exclusion, which equates to totally federal-income-tax-free treatment if you hold the shares for over five years before selling. I would go into further details but you may not make it to the end of the article but trust me on this one.


Break # 10: Tax-Free Withdrawals from Section 529 College Savings Plans and Coverdell 

Congrats, you made it to the end(hopefully).  Section 529 college savings plan accounts also allow earnings to accumulate free of any federal income tax.


The big selling point is that 529 accounts allow folks who can afford to make bigger contributions to get their college savings programs off the ground in a hurry. Then when the account beneficiary (typically your child or grandchild) reaches college age, tax-free withdrawals can be taken to cover higher education expenses. State income tax breaks are often available too.


Contributions to a 529 account will also reduce your taxable estate (if you’re worried about that), because the contributions are treated as gifts to the account beneficiary. Contributions in 2022 are eligible for the $16,000 annual federal gift tax exclusion. Contributions up to that amount won’t diminish your unified federal gift and estate tax exemption.


You can contribute up to $2,000 annually to a Coverdell Education Savings Account (CESA) set up for a beneficiary—typically your child or grandchild—who has not reached age 18. A CESA is an account set up by a “responsible person,( which if you are still reading this that’s you)  to function exclusively as an education savings vehicle for the designated account beneficiary.


CESA earnings are allowed to accumulate federal-income-tax-free. Then tax-free withdrawals can be taken to pay for the beneficiary’s college tuition, fees, books, supplies, and room and board. If you have several beneficiaries in mind, you can contribute up to $2,000 annually to separate CESAs set up for each one.8 Here’s the only catch: your right to make CESA contributions is phased out between MAGI of $95,000 and $110,000, or between $190,000 and $220,000 if you’re a married joint-filer.