Tax-exempt income is excluded from your total income, so you do not have to pay taxes on it. Some key suggestions for using the strategy of earning tax-exempt income include the following:

• Look for tax-free investments. Municipal bond interest is free from federal tax and may be free from state and local tax as well. By investing in municipal bonds you pay an implicit tax – the rate of return is lower than a comparable taxable bond. So, depending on your marginal tax rate it may or may not make sense to do this. Again, the goal should be to maximize your after-tax profits.
• Use medical savings accounts, also called flexible spending accounts, to pay medical bills. This way you are reducing income by paying medical bills with before-tax dollars.
• Pay your contributions to charity with appreciated long-term capital assets, assets which have increased in value. If you donate your appreciated assets to charity, not only do you get the full value of the donation, but you also do not have to pay the capital gains on the appreciated asset.  For example, suppose you have a stock that you paid $10 per share and it is now worth $20 per share.  If you sold it to pay your tithing, you would receive $20, but would have to pay capital gains taxes on your gain of $10 ($20 - $10).  At a 15% rate, you would only have $18.50 after taxes.  However, if you donated the stock to a 501c3 charity, i.e. a donation-in-kind, the charity received the stock, you receive a receipt for $20, and you do not have to pay capital gains tax on that stock.  For help with this process, see Learning Tool 8: Tithing Share Transfer Example in the Learning Tools section of this website.)