There are many ways to earn passive income but most of them are taxable. Here are some techniques to earn them tax-free. There are some settlements, credits, and payouts you can get without tax. Most of them are either paid only once or annually. Have a look at some passive income that is “tax-free”.
Tax-Free Municipal Bonds
One of the easiest ways to earn tax-free passive income from your investments is the purchase of municipal bonds which are tax-free at a federal level says Yahoo Finance.
Inheritances will always be tax-free no matter how large you get. However, there are six states that impose inheritance tax so you’ll have to check whether all your proceeds are completely tax-free.
Life Insurance Proceeds
If you are a beneficiary of a life insurance policy, your proceeds will be tax-free no matter how large the amount you get.
There are some cases in which disability payments are taxable unless you pay for all premiums of a health or accident insurance plan.
Gifts are taxable to the giver due to the annual gift exclusion level but the recipients never have to pay tax on what they receive.
As changes took effect last 2019, alimony is now tax-free wherein the payer can no longer deduct their alimony payments and recipients don’t need to pay tax on them. But there are still some states that do not observe this change like the state of California.
Similar to alimony payments, child support payments are neither deductible to the payer nor taxable to the recipients according to IRS.
Roth IRA Withdrawals
Unlike traditional IRAs, Roth IRAs’ tax distributions are tax-free. As long as you’ve held the account for at least five years and are older than 59.5; you won’t have to pay tax on any money you take out, even if it comes from interest or capital gains.
Disaster Mitigation Payments
After you endured a disaster, you are entitled to receive a tax-free disaster mitigation payment from your state.
Qualifying Adoption Reimbursements
Adoption refunds are also tax-free if the adoption expenses qualify. You can also exclude from income employer-provided adoption assistance payments.
Qualified HSA Funding Distribution
There is a one-time distribution from your IRA to an HSA account that you are allowed to take without having to pay tax on that transfer.
Income in a State With No Income Tax
There are eight states that do not tax income. They are Alaska, South Dakota, Nevada, Florida, Texas, Wyoming, Washington, and Tennessee. But you still need to pay federal taxes on your income even if you live in a state with no income tax.