How to Avoid Taxes on Interest Income

Temptation to earn more on your investment, and pay less in taxes is usually high among most investors. Taking into account some of the following considerations will help you get some tax exemptions, applicable to your interest income.

Instructions

  • 1

    Income Level

    It will all come down to the amount you earn. You may not even need to worry about making interest payments if you fall into a low income bracket. Your standard deductions and personal exemption may offset the amount you need to pay in taxes.

  • 2

    Investing the money on a tax-deferral basis

    Investment made in stocks, or any other form of securities will allow the holder or owner to earn some financial gain in the form of interest, dividends or capital gain. By opting to invest on a tax deferral basis, the investor will be accumulating tax-free until he or she withdraws on the investment.

    There are two basic advantages for an investor:

    First the earnings have a tax-free growth. Rather than paying on every gain for a particular investment, the investor will set a later date on which the tax is paid.

    Secondly, most investors will only withdraw when they feel that the investment has a low return. Thus, the taxable amount is usually low in the end.

  • 3

    Individual Retirement Account

    Investing in Roth IRA will ensure that you will not be entitled to pay any taxes on the interest amount you will be earning. This is specifically designed to encourage people to save some money for retirement. However, the scenario will vary in order to stop people from taking any unfair advantage. For instance, if you hold your money in a Roth IRA for 5 years, then you can withdraw the money tax free. Else, you will be charged a specific amount, much like in step 1, when the money is taken out.

  • 4

    Investing in government bonds

    Investing in municipal or Treasury bonds will save you tax money. This is the simplest and safest way of minimizing risk on your investment due to low or little default rate. However, the rate of the earnings will be relatively lesser than investing in other type of securities. Depending on your need, purchasing municipal bonds will ensure tax-free growth.

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