Americans work an average of 79 days a year to pay their federal income tax burdens and another 41 days to pay state and local taxes. By comparison, they work an average of 62 days to pay for housing and related costs.¹

If tax season has you searching for ways to lighten your tax load, here are two options to consider.

Loan Money to the Government
Interest paid by municipal bonds issued by your state or local government is typically free of federal income tax. Government entities issue municipal bonds to raise capital for infrastructure and other public projects.

You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. If a bond was issued by a municipality outside the state in which you reside, the interest could be subject to state and local income taxes. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest could be subject to the federal alternative minimum tax.

Live with Life Insurance
A permanent (or cash-value) life insurance policy can be tapped for income during your lifetime. This can result in a lower death benefit, so it’s something to consider in light of your overall circumstances.

Any premiums paid into the policy that are later withdrawn are not subject to income tax. Once all premiums have been withdrawn, you may be able to take tax-free loans against the policy’s cash value, but this strategy will reduce the death benefit if the loans are not repaid.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered, there may be surrender charges and income tax implications.

Managing your tax burden takes careful preparation and a solid understanding of your financial situation. Before you take any specific action, be sure to consult with your tax professional.

1) Tax Foundation, 2007