Today we’re just going to jump right in. You are here to receive my best advice, and that is exactly what you will receive.
US citizens run in circles to get tax breaks. These include a variety of tax credits, such as the earned income tax credit, the child tax credit, and breaks on capital gains tax, which all work to reduce the federal income tax. Individuals make contributions to health savings accounts, invest in retirement accounts to grow tax-free, and hope that their employers will offer flexible spending accounts.
You may not be able to deduct all of your contributions from your federal income taxes, and this may not even apply to your adjusted gross income.
You have the legal ability to fully evade paying all taxes in this tax system, including federal taxes.
The following four methods are thus the lawful means of avoiding paying US income tax:
Keywords: tax-free income, income tax, capital gains, qualified dividends, standard deduction, adjustments to income, deductions, 401(k), 403(b), health savings account (HSA), itemized deductions, tax-loss harvesting
Many people believe that paying income taxes is an unavoidable part of life. However, there are several strategies you can use to legally reduce your tax liability, and in some cases, even eliminate it altogether. This guide will explore how to make $100,000 or more and pay no income taxes, using a combination of legal strategies and tax-advantaged investments.
Understanding the Tax Code:
The key to paying no income taxes lies in understanding the tax code and taking advantage of its various provisions. Here are some key concepts to keep in mind:
- Taxable income: This is the amount of income you earn that is subject to taxation. It is calculated by subtracting your deductions from your adjusted gross income (AGI).
- Tax rate on long-term capital gains and qualified dividends: This rate is 0% for individuals with taxable income below certain thresholds.
- Standard deduction: This is a fixed amount of income that you can deduct from your taxable income, regardless of your expenses.
- Adjustments to income: These are deductions that reduce your AGI, such as contributions to retirement accounts.
- Deductions: These are expenses that you can deduct from your taxable income, such as mortgage interest and charitable contributions.
Strategies for Paying No Income Taxes:
1. Maximize Long-Term Capital Gains and Qualified Dividends:
The tax code offers a 0% rate on long-term capital gains and qualified dividends for individuals with taxable income below certain thresholds. For married couples filing jointly in 2023, the threshold is $89,250. This means that you can earn up to $89,250 in long-term capital gains and qualified dividends without paying any income taxes on them.
2. Take Advantage of the Standard Deduction:
The standard deduction for married couples filing jointly in 2023 is $27,700. This means that you can reduce your taxable income by $27,700, regardless of your expenses.
3. Contribute to Retirement Accounts:
Contributions to traditional 401(k) or 403(b) plans are made with pre-tax dollars, meaning they reduce your taxable income. In 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan.
4. Move to a Tax-Free State:
Nine states in the US have no income tax. Moving to one of these states can significantly reduce your tax burden.
5. Contribute to a Health Savings Account (HSA):
HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
6. Itemize Your Deductions:
If your itemized deductions exceed the standard deduction, you may be able to reduce your taxable income even further.
7. Use Tax-Loss Harvesting:
Tax-loss harvesting involves selling investments at a loss to offset capital gains and reduce your taxable income.
Additional Tips:
- Consult with a tax advisor: A tax advisor can help you develop a personalized tax strategy and ensure that you are taking advantage of all available deductions and credits.
- Stay informed about tax law changes: The tax code is constantly changing, so it’s important to stay up-to-date on the latest changes.
- Plan for the future: As your income grows, you may need to adjust your tax strategy to ensure that you are still paying no income taxes.
By understanding the tax code and taking advantage of the various strategies available, it is possible to make $100,000 or more and pay no income taxes. However, it’s important to note that these strategies may not be suitable for everyone. It’s essential to consult with a tax advisor to determine the best approach for your individual circumstances.
Frequently Asked Questions:
Q: Is it legal to pay no income taxes?
A: Yes, it is perfectly legal to pay no income taxes. The tax code provides many ways to reduce your tax liability, and in some cases, even eliminate it altogether.
Q: What is the best way to avoid paying income taxes?
A: There is no one-size-fits-all answer to this question. The best way to avoid paying income taxes will vary depending on your individual circumstances. However, some of the most effective strategies include maximizing long-term capital gains and qualified dividends, taking advantage of the standard deduction, and contributing to retirement accounts.
Q: What are the risks of trying to avoid paying income taxes?
A: There are a few risks associated with trying to avoid paying income taxes. First, you could make a mistake and end up owing the IRS money. Second, the IRS could audit you and determine that you owe taxes. Finally, if you are caught cheating on your taxes, you could face criminal charges.
Disclaimer:
The information provided in this guide is for general informational purposes only and should not be considered tax advice. It is essential to consult with a qualified tax advisor for advice on your specific situation.
Move outside of the United States
Living abroad for the majority of the year is one of the quickest and most straightforward ways to deduct taxes. This is known as the Foreign Earned Income Exclusion Physical Presence Test (FEIE). This test is widely known, and the majority of foreigners use it as a common tax strategy.
The IRS states that if you live abroad for at least 330 days out of the year, you are eligible to have $101,300 of your taxable income waived from your annual taxes. This strategy’s best feature is that it allows you to exit the US whenever you choose. I constantly tell you to get off your ass and move on with your life. Yes, you can! If you relocate, you can begin receiving benefits that are purportedly owed from 34 days ago. Furthermore, you could theoretically spend one month in the US even if, like me, you never travel there.
It is important to note that the exemption only applies to time spent in a foreign country or countries. It refers to “being in a foreign country or countries,” not just “being out of the United States 330 days.” In the end, international waters and air spaces do not count, so what difference does that make?
For instance, the man who was working on a yacht recently learned that his time spent outside of the US disqualified him from the FEIE. Even though he never visited the US, the exemption ended once he spent 35 days in international waters because those waters are not counted.
But generally speaking, it’s simple to be eligible for the physical presence test. The only other thing to consider is whether or not you frequently fly over oceans. It becomes more problematic if you have multiple lengthy flights abroad after spending four weeks in the US. If they ever check your time spent in international airspace, they might disqualify you without telling you because they saw that you spent eight or nine days flying over oceans or twelve days on a repositioning cruise in the middle of the sea.
Therefore, even though the Physical Presence test is a fantastic and extremely easy way to save taxes, there are a few things you need to be aware of to make sure it works.
Establish a residence somewhere else
Obviously, obtaining a second residency is one of the things I always advise people to do. It makes sense for a plethora of reasons and on a wide range of levels. Reducing your US income tax is one of these purposes. Nevertheless, only specific kinds of residencies are acceptable (though that’s a whole other topic). It really depends on your situation.
In general, I don’t think this is a great idea. This is for those who can actually set up residence outside of the US and wish to spend more time in the country. It won’t work if all you do is travel and live in another country every other week for a full year, then try to pass the bona fide residence test. It won’t work even if you have a residence permit. So this is a very difficult one.
If you qualify under the bona fide residence test, you can spend up to four months in the US. However, there are a lot of tax issues that come up if you’re running a business that you own and you’re spending four months a year in the US. The actual qualification process is very subjective. According to the IRS: