Love Tax-Free Income? Here Are 2 Ways to Get It

Taxes are a part of life, whether you're deep in the throes of your career or have been retired for many years. The IRS is entitled to a piece of pretty much any money you earn, whether it's wages from a job, interest in your savings account, or dividend payments that land in your brokerage account. And if you're saving for retirement in a traditional IRA or 401(k), the IRS will eventually tax you there, too, when you take withdrawals.

But what if there were a way to earn some income without having to pay the IRS a dime? Well, there is. Here are two ways you might manage to get your hands on tax-free income.

1. Hold stocks for a long time before selling them

When you sell a stock at a price that's higher than what you paid for it initially, you trigger capital gains taxes. Capital gains fall into two categories -- short-term and long-term.

Short-term capital gains apply to investments you hold for a year or less prior to selling them. Long-term capital gains apply to assets held for at least a year and a day prior to being sold.

It's beneficial to try to hold assets long enough to bump them into the long-term capital gains category, since gains in that category are taxed more favorably. Short-term gains are taxed the same way as ordinary income. So your tax rate on short-term gains could be as high as 37%, depending on your income, since that's the highest individual tax bracket today.

With long-term capital gains, the maximum tax rate you'll pay is 20%, and that's only if you're a very high earner. Moderate earners pay a 15% long-term capital gains rate. But you may be entitled to pay zero capital gains taxes if your income is low enough.

To be eligible for a 0% tax rate on long-term capital gains, your income must be:

• $44,625 or less as a single tax-filer
• $89,250 or less as a married couple filing jointly
• $59,750 a a head of household

Now that said, you should know that the 0% tax rate above refers to federal taxes on long-term capital gains. You may be subject to taxes at the state level, depending on where you live.

2. Invest in municipal bonds

Public companies commonly issue bonds to raise capital for different initiatives. States and cities can similarly issue bonds, known as municipal bonds, to fund public projects.

The upside of investing in bonds is getting to earn interest on them. Normally, bond interest is taxable. But if you buy municipal bonds, your interest payments, which you'll usually receive twice a year, are always exempt from federal taxes.

To be clear, you might still pay taxes on income related to municipal bonds. If you sell your bonds at a profit, capital gains taxes will apply. The federal tax benefit just mentioned applies to interest payments only.

Also, you may be subject to state taxes on your municipal bond interest. However, you can avoid that by investing in bonds issued by your state of residence.

It's hard to get out of paying taxes when you make money one way or another. But holding onto your investments for at least a year and a day before selling them and investing in municipal bonds are two good ways to potentially grow your wealth without incurring a tax bill in the process.