6 tax-free income opportunities

Believe it or not, there are still several ways to collect tax-free income and gains under current tax laws. Below are some of the best opportunities to put money in your pocket without current federal income tax implications, along with important details and limitations:

1. Roth IRAs:
Roth IRAs allow your investment earnings to accumulate tax-free. Qualified withdrawals—those made after age 59½ (or due to death or disability) and after the account has been open at least 5 years—are entirely free from federal income tax. Heirs may also generally take tax-free qualified withdrawals after your death, though certain timing and distribution requirements (such as the 10-year rule) may apply to beneficiaries.

2. Home Sale Exclusion:
If you sell your principal residence, you may be able to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from your federal income taxes. To qualify, you must have owned the home and used it as your principal residence for at least two of the five years before the sale date. Each exclusion can be used only once every two years, and special rules apply if you had periods of "non-qualified use" (such as renting it out). At least one spouse must meet the ownership test, and both must meet the use test for the $500,000 exclusion.

3. 0% Long-Term Capital Gains and Qualified Dividends Bracket:
Long-term capital gains and qualified dividends may be taxed at a 0% rate if your taxable income is below certain thresholds. In 2025, those thresholds are $48,350 for single filers and $96,700 for married couples filing jointly. This means you can potentially earn a substantial amount and pay no federal tax on these types of income, but only to the extent your total taxable income remains within those limits.

4. Gifts and Inheritances:
If you receive a gift or inheritance, you generally won’t owe federal income tax on the amount received. However, income generated after you receive the asset (such as interest, dividends, or rents) is taxable. For inherited assets such as stocks or real estate, the federal income tax basis usually “steps up” to fair market value as of the date of death (or an alternate valuation date if chosen by the estate). You only owe capital gains tax on appreciation after inheritance, when you sell the asset. The person making the gift may have gift tax issues, but the recipient usually does not owe tax for receiving it.

5. Qualified Small Business Stock (QSBS):
If you invest in “qualified small business stock” (generally, stock in certain domestic C-corporations acquired directly from the company), you may be eligible to exclude some or all of the gain on a sale after holding the shares for at least five years. However, there are many technical requirements on the type of company, how the shares were acquired, and limits on the amount excluded. Always review IRC Section 1202 with a tax professional for these cases.

6. 529 College Savings Plans and Coverdell Education Savings Accounts (ESAs):
Earnings in a 529 college savings plan can grow tax-free, and withdrawals used for qualified education expenses (such as tuition, fees, books, and room and board) are exempt from federal income tax. States may have their own rules and possible tax benefits. Contributions to a Coverdell ESA (limited to $2,000 per beneficiary annually) also grow tax-free and may be withdrawn tax-free when used for qualified education expenses. For ESAs, contribution limits phase out between modified adjusted gross incomes of $95,000–$110,000 (single) or $190,000–$220,000 (married filing jointly).

7. Life Insurance Proceeds:
Proceeds from a life insurance policy paid to a beneficiary because of the insured person’s death are generally not subject to federal income tax. However, if the proceeds earn interest while held by the insurance company, the interest portion is taxable. There could also be estate tax considerations for larger estates.

Advance Planning Is Essential
You may be able to collect federal-income-tax-free income or gains in several other situations not listed here, but each has important rules, restrictions, and exceptions. Consult with us at Satty before making any significant financial moves to ensure you take full advantage of these opportunities under current law.

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