3. Social Security
There was a time when Social Security was tax-free for everybody, but that unfortunately ended in 1983. A lot of people have to pay federal income tax on up to 85% of their benefits. If you don’t know how to find out what your provisional income is, just start with the adjusted gross income and add half of your Social Security benefits and all your tax-exempt interest.
If the income is less than $25,000, you are free from taxes regarding your Social Security benefits.
But if your income is somewhere between $25,000 and $34,000, then 50% of your benefits are taxable. And if, by any chance, your provisional income is more than $30,000, then 85% of your benefits are taxable.
If you are not sure how this works, on the IRS website you will find more useful information and it will help you find out if your benefits are taxable or not.
4. Municipal Bonds
Usually, the municipal bond is exempt from federal taxes. And you should remember that capital gains can be subject to a federal tax if you sell municipal bonds.
This topic is a bit more complicated than others mentioned before because interest from bonds issued in an investor’s home state is usually exempt from state income taxes, but for more certainty you should check your own state’s laws.
