Uncover the Secret to Tax-Free Passive Income: Know Your Options for Lowering Your Tax Bill

Taxable passive income sources are subject to taxes, but there are tax-free sources as well. Tax-free municipal bonds, inheritance, life insurance proceeds, gifts, child support, Roth IRA withdrawals, disaster mitigation payments, and qualified adoption reimbursements are all tax-free sources of passive income, according to a report by GOBankingRates on February 6, 2023.

Tax-free municipal bonds offer tax-free income, but capital gains are taxed. Inheritance is tax-free at the federal level but may be taxed by some states. Life insurance proceeds are tax-free if the recipient is the named beneficiary, but cashing in a policy may result in paying taxes.

Gifts over the annual gift tax exclusion level of $17,000 per person are taxable to the giver but not to the recipient. Child support and alimony payments are neither deductible nor taxable, but some states may still tax alimony. Roth IRAs provide tax-free distributions if certain conditions are met, such as being held for at least 5 years and the owner being over 59.5.

Reducing taxes on taxable passive income can be done using tax-deferred accounts, holding investments long-term, and harvesting tax losses. These strategies can defer taxes, reduce ordinary income, and lower the overall tax bill. Additionally, living in a state without income tax can result in non-taxable regular income.

It’s Important to understand the tax implications of different types of passive income and to consult a financial advisor to develop a strategy that works best for you. Whether you’re looking for tax-free income or trying to reduce your overall tax bill, there are options available to meet your goals.