The Goal is to Pay No Income Taxes, Legally

Taxes. They come in many forms. Some are hidden: corporate taxes are built into the cost of goods and services you buy; excise taxes are included into products like gasoline. 

Others are more visible like sales and property taxes. And then we come to the most visible and dreaded tax of all: income tax. When people complain about taxes they are usually talking about income taxes.

Avoiding income taxes should be easy considering the size of the tax code and the millions of loopholes available. And that is the problem. The tax code is so big that it is daunting so most people have their eyes roll back in their head when they should be facing the tax code head on.

We will discuss several avenues to a zero out your income tax, but first some ground rules.

1. Keeping your income low is not eliminating taxes; it is eliminating income at a 100% tax rate. Our discussion will focus on ways to eliminate income taxes at any income level, with only a slight nod to lower incomes where incomes taxes rarely apply.
2. Tax credits can cut your taxes significantly. I’ll point out a few of these obvious gems, but will not hang my hat on mainstream tax credits to eliminate your income tax.
3. No using cheap gimmicks like “have three kids” to eliminate your income taxes. I will assume no children in most of my strategies here.
4. Debt is not tax-free income. Borrowing more money is NOT a tax strategy! No universal life craziness on this blog, either.
5. Our inquiry will focus on tax strategies available to a large number of people and legal ways of converting taxable income into tax-free income.

Before we begin our analysis I want to point you to an excellent article on this topic published by the Root of Good blog in 2013. The Tax Cuts and Jobs Act of 2017 (TCJA) changed many of the rules the Root of Good blog post used. Still, it is a good place to get ideas for the flavor of strategies available.

I also discussed 10 Ways to Legally Stop Paying Taxes in a prior post on this blog. You may wish to review that post as well if you are serious about reducing or eliminating your income tax.

 

Income Tax on Income Under $100,000

A short nod to readers with a five-figure income. 

There are so many tools for eliminating incomes taxes on incomes under $100,000 that I will only scratch a few. 

1. Social Security benefits can be partially or totally tax-free. This link provides more details.
2. The TCJA eliminated exemptions, but jacked the standard deduction. In 2017 the standard deduction on a joint return was $12,700. In 2021 the standard deduction is $25,100 on a MFJ return; $12,550 for MFS and single taxpayers; and $18,800 for heads of household. This means a married couple filing a joint return gets a $25,100 deduction right out of the gate. 
3. Long-term capital gains enjoy a large 0% tax bracket. In 2021, the 0% tax rate for LTCGs income threshold is $80, 800 for married couples filing a joint return; $54,100 for heads of household; and $40,400 for single and MFS taxpayers. The easiest way to look at this is to add all your taxable income together and stack the LTCGs and qualified dividends on top. The portion below $80,800 for a MFJ return is taxed at 0%. Add this to the standard deduction and a married couple filing a joint return can enjoy $105,900 of income without an income tax with this one strategy alone in 2021. This is an incredible tax opportunity for those retiring early. 

A plethora of tax credits are available for low incomers. Your facts and circumstances will prevail. 

The Child Tax Credit (CTC) is a bit more complex in 2021 than in prior years. Portions of the CTC phase out well into the six-figures. 

Other common credits that can reduce your income taxes are:

1. Earned Income Credit
2. Saver’s Credit
3. Education Credits
4. Child and Dependent Care Credit

There is also a small credit for nonbusiness energy improvements for homeowners. Then there is the Premium Tax Credit. This is a big credit for those with lower incomes. You can do more research on the PTC here.

There is another new massive temporary tax-free employee benefit made available under the CARES Act. Employers can pay to the employee or the student loan provider up to $5,250 for student loan repayments. This break is available for tax years ending December 31, 2025 or before. That means you have several years to accumulate this tax-free income.

Note: You can’t take the student loan interest deduction if your employer provided the tax-free funds. However, if you made additional student loan payment you may get an additional deduction there as well. Example:

• Student loan interest: $2,000
• Employer paid $5,250 of your student loans
• You paid an additional $2,000 of your student loans.

In this scenario you could also qualify for a $2,000 student loan interest deduction as long as you are below the income threshold. What is less clear to this accountant is if you need to pay the interest out of your funds and the principle from employer funds or not, and how that would be segregated.

One last gift from Congress for those with a modest income. If you have a health savings account qualified health insurance plan you need to fill that HSA savings account. Contributions are deductible, earnings grow tax-free and the whole thing comes back to you outside income taxes if used for qualified medical expenses or Medicare premiums once you turn 65.

The Easy Income Tax Deductions

Now we turn to taxpayers with higher income. Some of these strategies apply to people with lower income as well, but the focus in the remainder of this article is on eliminating income taxes for taxpayers with a six-figure or higher income. 

Let’s start with some low hanging fruit. Here are several sources of tax-free income:

1. Some alimony. Use the link for more details.
2. Child support payments are always tax-free.
3. Inheritances, gifts and bequests.
4. Cash rebates
5. Most employer provided healthcare benefits.
6. Foster care stipends
7. Worker’s Compensation benefits
8. Disability benefits if you paid for the premiums.
9. §121 exclusion of up to $250,000 of gains from the sale of your primary residence per person.
10. Foreign Income Exclusion
11. Death benefit from a life insurance policy

A source of income I do not consider tax-free income is employer matching in retirement funds because the employer contribution always goes to the traditional part of the retirement plan, even if you elect to have your 401(k) contributions treated as Roth contributions. The income is not tax-free; it is tax-deferred. This is where I disagree with the Root of Good blog post. That post suggested deductions for the current year eliminated income taxes when all it did was push them into the future where tax rates on retirement plan distributions are uncertain.

The same can be said about souped-up retirement plans like cash balance accounts. A lot of money can be deducted currently with these plans and investments grow tax-deferred. But somebody at some point is going to pay the national uncle on the east coast. 

 

Two Unique Sources of Tax-free Income

Now I want to share what I consider two very powerful tools for generating massive amounts of tax-free income.

The first involves the cash rebates listed above. Most credit and debit cards provide some kind of cash-back these days. Some offer airline or travel rewards. In either case, these rewards are tax-free. 

We need to delineate what is a rebate and what isn’t before continuing. When you get a bonus on a bank account that is interest income. Selling tradelines are also income. What I’m talking about is sign-on bonuses and the continuing cash-back rewards offered by the myriad credit card companies.

This leads to an interesting situation. The sign-on bonuses can be large, say, $500 for $3,000 of spending in the first 90 days, plus the regular cash-back the card offers. Churning cards and manufacturing spending can turn no real spending into large amounts of cash-back fast, which is still tax-free. 

There are so many ways to game the system with cash-back rewards. I suggest a deep dive into Doctor of Credit (DoC) if this interests you. Be warned, this is a rabbit hole. The number of ways to get a steady stream of small incomes is nearly endless. DoC provides a nice ongoing list of opportunities to profit. Subscribing to their mailing list is a must in such situations. (Note: I am in no way related or connected to DoC. This is NOT an affiliate link of any sort.)

A Billion Dollars Tax-free

A common complain in my email is that I focus too much on people with higher income. That isn’t true! I spend plenty of time outlining tax strategies for people with lower levels of income. The ones I tend to avoid helping (until now) are the uber-rich! (Except when consulting. Most consulting clients tend to be very high earners.)

One of the most powerful tools for generating tax-free income is the Roth IRA. The mechanics are as such: Money going in is after -tax (meaning it has been taxed already) and money coming out, including profits, are not included in income once you reach age 59½. (In most cases your basis is available for distribution at any age.) 

Most people don’t see the massive loophole. Any asset placed into the Roth grows tax-free. What asset could you possible own that grows really fast, turning a small amount into a really big amount in a short order of time?

Let me give you a hint. There is at least one guy (it is a guy) who placed less than $2,000 into his Roth IRA and turned it into $5  billion! Think about that for a minute: $4,999,998,000 tax-free. Sure beats winning the lottery and anybody can use the same strategy. One particular accountant in the room did, only to a much, much smaller degree.

Peter Thiel, a co-founder of PayPal, started with less than $2,000 in his Roth IRA and parlayed it into $5 billion. So how did he do it? And more important, can you?

Well, let me give you a hint. I have done it, only with a lot smaller balance.

It started many years ago when I ran a small hedge fund. Using my Roth I was able to turn a small amount into a much larger amount, all tax-free. In less than two years I can touch those gains and never pay a penny in income tax ever! Until then I can keep investing and growing the pile more. (The basis is currently available.)

What about you? How can you super charge your tax-free income? Simple. You can either invest in market securities or index funds and enjoy those returns, or, invest in your own company, placed inside a Roth. Cryptocurrencies can also be placed inside a Roth. 

It is the early years of business growth that pound returns north fast. Peter Thiel invests and continues investing in start-ups. You can do that to a lesser extent, but you can easily start a business with the shares held by the Roth. The biggest obstacle is finding an IRA administrator that allows such investments inside Roth IRAs. You may have a local firm that handles such Roth IRAs if you look. You can also check Equity Trust. (Not an affiliate.) Be sure to do your due diligence before moving money.

 

There are so many opportunities available to eliminate your federal income tax. You can mix and match the strategies listed above and more in an endless number of ways. I spend most days at the office consulting with clients on just such issues. Sometimes my hands are tied and the benefits are limited (still profitable for the client, but limited). Most of the time we crush the tax beast. 

One word of caution before I leave you to your cup of coffee. Never fall for the old trick of lower taxes for the current year only. That is a very easy game to play that ultimately screws the client (that is you, my taxpaying reader). When I work with clients I consider “all years involved”. That means investments into a traditional retirement account requires consideration for the tax consequences when the money comes out.

Now, get creative, but stay legal. You want to keep your money and enjoy it too.

 

 

More Wealth Building Resources

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Blockfi is currently paying 7.5%.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.