Tax-Exempt Income

Music to your ears, chocolate to your tongue, dogs to your soul—tax-exempt income to your wallet.

Tax-exempt income is income that you don’t have to pay taxes on. Bear in mind that, while used in a general sense likely refers to federal taxes, your state may also have its own rules about what income is tax-exempt.

How can you cash in on tax-exempt income? (Or rather...just have less friction when you earn it?) Some types of federal tax-exempt income run as follows:

- Roth IRA distributions (only when you withdraw it in retirement—doing so beforehand will mean you have to pay normal income taxes on it and a penalty on top of that. So don’t do it)

- Municipal bonds (though they are pretty low on gaining interest in the first place)

- Academic scholarships (how fast do you run a 40?)

- Death benefits (sometimes)

Things have changed a bit since the Trump train rolled into the station. Personal exemptions (a federal income tax break, which especially helps large families) are on their way out, and standard deductions (which you can only use if you don’t choose itemized deductions) are on the uptick. The Tax Cuts and Job Act of 2017 also phases out the Alternative Minimum Tax, which was a special tax for the richest of the land. Only your own tax return will tell if these new changes resulted in higher or lower taxes for you.