How Can The Average American Pay No Taxes?

in Financial Planning by

Most people grow accustomed to the big chunk of federal income tax withheld in each paycheck. The more you make, the more they take.

Americans paid over $1.3 trillion dollars in federal income tax during 2012. Most of the tax burden fell on the highest income earners. According to the IRS, the top half of taxpayers paid 98% of all federal income tax with the top 5% of taxpayers paid 59% of the all taxes. Those taxpayers falling in the lower half of the income distribution paid only 2% of the total income tax burden despite earning roughly 13% of all income.

Every election season, the equity and fairness of our tax structure is a hotly debated topic. Some say we pay too much tax, period. Others say the hardest working, most productive members of society are unfairly burdened with a disproportionate share of the total tax bill. A third group says the middle class suffers from excessive taxation. Where you stand on the question of taxes often depends on how much you make and how much you pay.

Regardless of one’s opinion on the fairness of our tax structure, we can all agree that the tax code is complicated. However, the basic framework is simple. Your tax rate gets progressively higher as your income increases. The complexity arises from the various deductions and credits available to taxpayers that plan carefully. Another layer of complexity arises when these deductions and credits phase out as incomes increase.

Are taxpayers that take advantage of many deductions and credits carrying their fair share of the tax burden? Or are they cheating the system by finding tax loopholes to weasel out of their tax liabilities? The tax system we have doesn’t always seem fair, and the best way to make it fair is to lobby our elected representatives for true tax reform to ensure the tax burden is shared equitably among all taxpayers.

Some taxpayers can earn over $100,000 and still manage to pay zero tax. Ignoring issues of fairness, it is financially prudent to take any available tax deductions and credits for which you qualify.

In this edition of the Daily Capital, we present four examples of ordinary people with decent salaries that manage to keep the tax man at bay.

John: 23 Year Old Recent College Grad

In the first example we have John, a 23 year old who wants to keep his tax bill at zero. John just finished college and recently started full time employment at an entry level salary of $30,000. John managed to live frugally while in school and is willing to maintain the college student lifestyle for a few more years. John studied finance in college and knows the power of compounding investment returns. He knows that investment contributions made while he is in his twenties will grow for decades to come, thereby securing a safe retirement.

Since John has roommates that split the rent and utilities, John feels comfortable living on $1,300 per month total out of his $2,500 monthly paycheck. John participates in his employer’s 401k plan by contributing $1,000 per month. This leaves $200 from each paycheck to cover Social Security and Medicare tax withholding.

23 year old

For tax purposes, what started out as a $30,000 salary becomes $18,000 in income after subtracting the $12,000 John contributes to his 401k during the year. For tax year 2014, an individual taxpayer with no dependents will owe $785 on $18,000 income. Since John funds his 401k account throughout the year, he is entitled to take the “Retirement Savings Contributions Credit”. John’s Retirement Savings Contributions Credit will be $785. This credit will reduce his tax bill to zero.

The Retirement Savings Contributions Credit, or Saver’s Credit, offers taxpayers a credit of 10% to 50% of contributions to retirement savings accounts such as a 401k or an IRA. Individuals may take the credit on up to $2,000 of contributions, while married couples may take the credit on up to $4,000 of contributions. The maximum credit for individuals is 50% of $2,000 (or $1,000) with an adjusted gross income up to $18,000. A reduced Saver’s Credit is available to individual taxpayers with adjusted gross incomes up to $30,000.

The amount of the credit is limited to the total tax owed by the taxpayer. In John’s case, he qualifies to receive up to $1,000 for the Saver’s Credit. Since his tax bill without the Saver’s Credit is only $785, the Saver’s Credit is limited to $785. Unlike some credits (such as the Earned Income Credit and the Additional Child Tax Credit), the Saver’s Credit is not refundable if the credit exceeds the taxpayer’s tax liability.

John can keep his tax bill at zero even if he gets a raise. If he increases his 401k contributions by the amount of his raise each year, his adjusted gross income will remain at $18,000 and he will continue to receive the Retirement Savings Contributions Credit.

The Smiths: Married Couple, 40 Years Old With Two Kids

The Smith family is our second example of a household that pays zero federal income tax. Mr. and Mrs. Smith are both 40 years old and they have two kids in elementary school. Together, the Smiths earn $103,250 per year from their full time jobs.

The Smiths put a strong emphasis on retirement savings by contributing the maximum to their 401ks ($17,500 each) and traditional IRAs ($5,500 each). In total, they contribute $46,000 to their retirement accounts.

Since the Smiths have two children in elementary school, they have to pay for after school care during the school year and some child care during the summer months. The total child care costs amount to $5,000 per year. The Smiths contribute $5,000 to their childcare flexible spending account provided by Mrs. Smith’s employer, and this amount is taken out of her paycheck pre-tax.

Similarly, Mrs. Smith contributes $2,000 per year to her healthcare flexible spending account, which is also deducted from her paycheck pre-tax. With the family’s typical medical and dental expenses, they are certain to use the $2,000 each year.

40_year_old_couple_zero_tax

After taking these deductions from their gross income, their $103,250 combined salaries are reduced to an adjusted gross income of $50,250. A married couple with two children will owe $2,400 income tax on a $50,250 adjusted gross income. The Smiths are able to take the child tax credit of $2,000 ($1,000 per kid) and the Retirement Savings Contributions Credit of $400.

Married taxpayers with an adjusted gross income between $39,001 and $60,000 are entitled to take a Saver’s Credit equal to 10% of up to $4,000 in retirement contributions. The Smiths’ adjusted gross income of $50,250 means their Retirement Savings Contributions Credit is $400 (10% of $4,000).

Their tax credits totaling $2,400 completely offset the tax liability they would otherwise have on their $50,250 adjusted gross income.  The Smiths will owe zero tax.

Even though the Smiths enjoy a six figure gross income, they still manage to bring their federal income tax bill down to zero by taking advantage of a number of tax credits and deductions.

The Jacksons: Married Couple, 55 years Old, Empty Nesters

The Jackson family will serve as our third example of how ordinary households can avoid paying federal income tax. The Jacksons’ total annual salaries sum to $105,550.

Mr. and Mrs. Jackson raised two wonderful children and are now looking forward to retirement within five years. The two Jackson children have finished college and are no longer dependents on their 55 year old parents. The Jacksons are also proud of recently paying off their 30 year mortgage on the house they bought when they were newlyweds.

With the kids out of the house and the house paid off, the Jacksons find themselves with lots of disposable income. Since Mr. and Mrs. Jackson are nearing retirement age, they want to put the disposable income to work for themselves by turbocharging their retirement savings.

55_year_old_couple_zero_tax

The Jacksons are in luck because IRS rules allow taxpayers age 50 or over to make “catch up” contributions to their 401k’s and IRAs. An individual age 50 or over can make an additional $5,500 catch up contribution to their 401k, and an additional $1,000 catch up contribution to their IRA. This means taxpayers age 50 or over can contribute a total of $23,000 per year to a 401k and $6,500 to an IRA. Spouses age 50 or over are also entitled to make these catch up contributions. The Jacksons contribute the maximum (including catch up contributions) to their 401ks and their traditional IRAs, which amounts to $59,000 for 2014.

Mr. and Mrs. Jackson don’t have any significant health issues right now, but they want to ensure they have adequate savings to pay for healthcare expenses in retirement. Mr. Jackson contributes the maximum of $7,550 to his Health Savings Account offered by his employer.

Most families can contribute a maximum of $6,550 to a Health Savings Account (or HSA). However, the catch up provisions for taxpayers age 55 or over allow an additional $1,000 contribution for a total maximum contribution of $7,550. Amounts contributed to an HSA remain in the account year after year if they are not spent (in contrast to flexible spending accounts whose remaining balances are mostly forfeited at the end of the year).

The Jacksons have some investments in a brokerage account that they manage on their own. Mrs. Jackson enjoys overseeing the individual holdings and she “tax loss harvests” at least $3,000 per year from these taxable investments.

Tax loss harvesting is a method of selling securities that have decreased in value in order to recognize a capital loss.  Somewhat similar (but not “substantially similar” per IRS definitions) investments can be purchased to replace the sold investments. The advantage of tax loss harvesting is that up to $3,000 per year of capital losses can be written off against ordinary income. The Jacksons do exactly that. They deduct the $3,000 capital loss generated from tax loss harvesting, further reducing their adjusted gross income.

After deducting the 401k and IRA contributions, the health savings account contributions, and the capital loss deduction, the Jacksons manage to reduce their $105,550 earned income down to an adjusted gross income of $36,000!

For a married couple with no additional dependents, the tax liability on $36,000 income (after the standard deduction and personal exemptions) is $1,570.  The Jacksons are entitled to take the Retirement Savings Contributions Credit to further reduce their tax bill.

At an adjusted gross income up to $36,000, married couples can take a credit of 50% of up to $4,000 of retirement contributions. This would allow the Jacksons a $2,000 tax credit. The credit is limited to the tax actually owed by the taxpayers, which is $1,570 for the Jacksons. The Jacksons take the $1,570 Retirement Savings Contributions Credit and reduce their tax bill to zero.

The McCurry’s:  30-Something Married Couple, 3 Young Children

For the final example, I will share my own tax situation.  In 2013, my wife and I earned approximately $150,000 between salaries and some moderate investment income. We have three young children.

30_something_income

In the first table, our gross salaries are shown along with all the deductions from our salary for retirement savings, child care flexible spending account, health savings account, health insurance, and dental insurance. After all the deductions, our $141,000 combined gross salaries are reduced to a net of $71,750 (almost a 50% reduction).

30_something_tax

In this second table, our earned income and investment income is shown along with another series of deductions including the capital losses from tax loss harvesting and the student loan interest deduction.  Since we have three children, we received $3,000 of child tax credits.  We also had $300 foreign tax withheld on our investment income, thereby generating a $300 foreign income tax credit.

Although we didn’t manage to get our tax liability to zero, our final tax bill was whittled down to $150, or 0.1% of our $150,000 gross income. I can’t argue the tax I paid is “fair”, but it is certainly allowed by the tax code.

Conclusion

With some level of planning, it isn’t impossible to file a 1040 that shows zero tax liability. The four examples highlighted in this article show various taxpayers at different stages of life that manage to dodge the tax man. Three of the example households reduced their tax bill to zero (or near zero in my case) in spite of earning six figure salaries.

How did these taxpayers reach a zero dollar tax bill and how can you do the same?

The reality is clear – careful tax planning can slash your tax bill to almost nothing even if you have a fairly high income.

Minimize your taxes by staying on top of your finances with Personal Capital today.

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photo credit: tolworthy at flickr under creative commons license

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Justin McCurry

Justin McCurry

At age 33 Justin retired from a career in civil engineering to spend more time with his family and pursue his other interests and hobbies. Justin founded RootofGood.com where he shares advice on reaching financial independence and enjoying the early retired life. After graduating NC State University with degrees in Civil Engineering and Spanish, Justin earned a Doctor of Jurisprudence degree from the School of Law at the University of North Carolina, Chapel Hill.

49 comments

  1. Financial Samurai

    Hi Justin,

    Nice work on showing everyone how it’s done! The immediate feedback I’ve seen over social media is “can’t max out 401k, need more money to survive.” I’ve heard a lot of excuses as to why people don’t save and I’m not sure whether it’s “can’t” or “don’t want.”

    What would you say is the sweet spot income level for an individual and a family of four to pay as little taxes as possible while having the best life possible? It seems like $130,000-$150,000 is pretty darn good in your example.

    I’m looking at around $200,000-$250,000 for one or two in places like SF or Manhattan.

    Thanks,

    Sam

    Reply
    • Justin McCurry

      Justin McCurry

      It’s a tough question because cost of living is so location dependent. Where I live in the Southeast, housing is cheap, property taxes are low, labor is cheap, and parking is free. Can’t say the same for Manhattan or SF!

      A family living on $50,000 per year (the 40 year old Smiths in this article) ARE the average American family. Median household income in the US is $53,000. That means half the households live on less than that amount every year.

      I understand (and sympathize) with those living in higher cost of living areas. The upside is higher earnings potential and sometimes awesome weather. The downside is a much larger tax bite.

      I don’t think $50,000 would afford most people a comfortable life in high COL areas. That’s probably just enough to rent a moderately spacious 3 bedroom apartment in some areas of Manhattan, for example. And you still have to eat, pay the utility bills, and take care of all the other essentials. Throw those in and you’re probably talking $100,000. Or living really far away from your job to save money and then suffering through a horribly long commute.

      Reply
    • Dahlilah Neinas

      👌📱😺

      Reply
  2. Bill

    Uuugggghhhh!!!!!!!!

    My AGI is significantly higher than the examples above. Between state, local, and federal taxes I’m paying a 48 percent rate. For every dollar I make I pay .48 cents in taxes. My accountant says I make to much to receive most of the standard deductions and not enough to hide my income like the big boys.

    I’m conflicted about the examples above. On one hand I’m proud and jealous how people can eliminate their tax bill. On the other hand I’m pissed off I’m paying nearly half my income when I’m receiving the same, “if not less” of the same services provided from the government as the examples given.

    Reply
    • Financial Samurai

      Hopefully you aren’t paying a 48% effective rate, just 48% at the margin?

      If your AGI is significantly higher than $150,000, then it’s all about giving yourself a high five! Where do you live? Also, how much are you able to save a year?

      Reply
  3. Michael Young

    You guys should note for readers that by deducting IRA contributions, you’re just deferring the tax liability to future years. It’s not *really* like you’re not paying any taxes…

    Reply
  4. Steve

    I agree. This is a nice illustration, but it has no basis in reality for, probably, anyone. I mean the first example suggests this (young) person contributes 40% of the income to retirement? That’s ridiculous. And he lives on $1300/mo? Certainly not in Boulder, CO. $1300/mo is enough to cover rent, utilities, groceries, student debt, emergency savings, accumulation goals, insurance needs, etc. etc.? There’s no way. The person would never own a home, never be able to purchase a vehicle and never go on vacation. The other examples run into the same problems. If you take the example in a vacuum and just assume people can do any mathematical thing, then sure, it sounds great. But what’s the point of writing this article if it’s not possible?

    Reply
    • Financial Samurai

      I see your point, but the thing is, it is possible because the writer provided his own example at the end and he did it.

      Also, our attempt is to show what is possible. Living off $1,300 a month in Colorado doesn’t sound that far fetched.

      Reply
    • Justin McCurry

      The 23 year old has roommates and a bike. He occasionally borrows his friend’s car (in exchange for a case of beer) for weekend outings. Maybe he likes free things abundant in Colorado. Hiking, mountain biking, swimming?

      Or John could be a 23 year old guy fresh out of college still living with his parents. Plenty of Millennials are probably in that situation. Earning $30k at their first job and not quite ready to venture into the “real world”.

      Most 23 year olds probably won’t resist the temptation to spend 100% of their earnings, but it doesn’t mean John and others like him can’t make smart choices.

      Reply
      • Sable

        I’m in my 20s and I take offense to this statement. Let’s take this example apart.

        I found a Kensington apartment complex in Boulder. According to their website, a 3 bed/2 bath apartment there is $1,950 per month. Assuming John has 2 roommates, each roommate is paying $650 per month. We are, by the way, completely disregarding the risk that one of the roommates’ checks bounces one month and they all get evicted, forfeiting their security deposit. (BTDT.)

        After $650 in rent, John is left with $650 per month to live on. Assume he pays $30 per month for utilities/Internet/etc; now we’re at $620. Based on the information provided about his income, it doesn’t look like John gets health insurance through his workplace. That’ll be, on the conservative end, $200/month. Now let’s assume he pays $50/week for groceries. $50 x 4.332 (wks in month) = $216.60. If you don’t have your calculator handy, we’re now at $203.40/mo to live on. The average student leaves college with $25,000 in student loan debt. Since we’ve been told how savvy John is, let’s give his family the benefit of the doubt and assume his parents had significant college savings for him. (Mine had exactly $0, btw, and I’m FAR from alone.) We’ll say John took out $15,000 in student loans, 40% less than the national average. His monthly loan payment, then, is $173.

        John has exactly $30.40 of wiggle room every month. This assumes his bike never breaks down or needs a new tire, that he really never needs to drive anywhere (may I ask how exactly he gets to work during the winter?), that he never goes out, period….

        Totally unrealistic.

        I’m not contributing $12k a year to my 401k on my $30k salary, though I’d love to be. And I don’t lack discipline, as you suggest. The numbers just don’t work in reality for a lot of Millenials like myself, and frankly we’re tired of being told we’re lazy or undisciplined when we are simply trying to keep our heads above water.

        I would love to see some realistic advice for people like me; I love this website and the writers but very little of the content is applicable to me.

        Reply
        • Financial Samurai

          Hi Sable,

          With the recent graduate making $30,000 a year, I don’t think Justin is saying this is what every college graduate in this position should do. He is just highlighting what is POSSIBLE. I think it’s helpful to highlight extremes to see the possibilities. Then it’s up to us to choose what fits best with us.

          With $30,000 in Boulder, I’d probably be able to contribute $8,000 pre-tax. But to each their own.

          Reply
        • CL

          When I first read the article, I had the same reaction as you: This is unrealistic for someone in their 20s. However, it was in the opposite direction. I thought that budgeting $1300 was too much.

          I think it really depends on where you live. Boulder seems expensive, but I live in another college town, Madison, WI.

          My half of expenses:
          Internet 23.74
          Food 110-200
          Electric 15-20
          Gas (heating) 7-23
          Gas (car) 19
          Rent 565

          My necessary monthly expenses are between $739.74 and $850.74 (based on data from the last 90 days). I go out plus I take vacations, and I still spend less than $1,300 per month. Even if you added the $173 towards student debt and the $200 towards insurance (common expenses for people our age), you still don’t hit $1,300 for a normal month.

          That said, I tried to look up insurance in Boulder and Madison. My cheapest plan for someone 22 in Madison is $127. The cheapest plan in Boulder for the same person is $357. I guess living in Boulder is not a good choice for someone who is making an entry level wage.

          Reply
          • Justin

            Thanks, CL. That’s a great example of actual expenses paid by a 20-something.

            And I bet there are even less expensive places than Madison, WI where you can still find $30,000/year jobs for recent college graduates. In my experience, college towns often have high rent rates compared to entry level jobs available. Probably because college towns are pretty fun places to live for young people!

          • Bobby Cooper

            I think the article should of been entitled, “Why poor people will never pay income taxes based on class warfare”.

            Its only a matter of time before poor people making under $10,000 a year working at Mc Donalds realize that they can legally file Exempt on their W4. Here is why:

            Did you know that people who make less than $10,000 a year from what is considered ordinary income are not required to file an income tax return ?

            If you go the IRS [dot] gov website and browse to Individual Taxpayer webpage there is a tool (webpage) that you can use to verify what I am saying is actually “TRUE”. People who make less than $10,000 are not required to file an income tax return.

            How can this be possible ? Well, if a person has ordinary income from one or more jobs, the employer takes out all necessary taxes and if done correctly where enough taxes (Social Security, Medicare, Income taxes) and a person makes less than $10,000 that person will not owe any income taxes after all deductions are made if they were to file an income tax return. Resulting in “no taxes due” on their income and no requirement to file an income tax return.

            Normally, this would only apply to people with ordinary income but, there is a way for people who are self employed to have the benefit of not having to file an income tax return. I say benefit because and as you will see, this opens a door for those who do not want to be part of ObamaCare or Medicaid. Yep, this is also true.

            Under the Affordable Care Act those who are NOT required to file a income tax return are not required to maintain health insurance. Its that simple !

            Forgot to mention the best part of all: You can file “EXEMPT” on your W4 and not pay income taxes all year just to get it back at the end of the year !!!!!

            Do your own research and you will see that you can also not file an income tax return providing you make less than $10,000 of ordinary income, however, there is a way for people who are self-employed to repeat the benefits of non-income tax filing.

            Its too late to effect your 2014 year income but, you can start on your 2015 self-employment tax quarterly payments. That’s Right ? Do you see where this is going ?

            As a self-employed person who makes less than $10,000 a year can file quarterly Self-employment tax payments and if you do it right ! You will not be required to file a Federal Income Tax filing at the end of the year. Now, this will not help those who have children and need to deduct losses and carry those losses to future years but, if you are like me ? Good-bye to filing Federal Income Tax forms and Good Riddance to OBAMACARE !

            Forgot to mention the best part of all: You can file “EXEMPT” on your W4 and not pay income taxes all year just to get it back at the end of the year !!!!!

        • Justin

          As they say, Your Mileage May Vary!

          I had no idea $2000/month was the best you can find on college student-ish rentals in Boulder. That sounds like a rough place to live if you are interested in building your wealth over time (unless jobs pay really well?).

          But for many 23 year olds across the nation, the cost of living is much more moderate. In much of the southeast and midwest, for example, 3-4 bedroom houses or apartments are about half the rates in Boulder. That would free up a lot of discretionary income to cover other expenses.

          The example of 23 year old John isn’t applicable to all 23 year olds. It’s really dependent on each person’s individual situation.

          And no disrespect intended towards Millennials. I’m actually one myself based on when I started my first post-college full time job (2004) at age 23. Getting established in life is tough, but focusing on saving early on can really turbocharge wealth creation long term.

          May I ask how much you are able to contribute to a 401k, if any?

          Reply
        • Bill Brown

          Realistic advice: don’t go to Starbucks every day; make your coffee at home and bring it with you in a thermos. Pack a lunch and take it with you. Do your own laundry rather than dry cleaning it. Learn to prepare your own food rather than going out to eat all the time. Don’t buy bottled water, drink from a fountain or refill your plastic water bottles (also saving the planet).
          There are more but this will start you along.

          Reply
        • Billy

          Then you do not want to sacrifice anything for your future; the idea is to retire as soon as you can. Comments like yours make humans look fucking stupid!

          Reply
  5. Tyler

    I am surprised that in all of these cases there was not a single example of charitable giving. While qualifying for a tax deduction if itemized, more importantly they support people and worthy causes of value to communities.

    Reply
  6. jim

    In your “real life” 3 kid family example, you assume both the husband and wife work and make a similar salary. Try it with the same total salary, but only the hubby works, and the wife is a stay at home mom, with no income.
    Quite a different result!

    Reply
    • Justin McCurry

      Justin McCurry

      That is my real life example and not a hypothetical like the others. We would definitely end up with more taxes because we couldn’t take advantage of the extra 401k contributions. And we wouldn’t have the child care FSA contributions. Although we would save on the actual child care expenses.

      Reply
  7. BJ Flora

    I just subscribed to this feed and look forward to some helpful advice; however, this isn’t a good start. There is a huge disconnect between the headline and the supporting examples. The examples show people dumping nearly everything possible into tax deferred accounts. My reading suggests that the “average” taxpayer does no such thing. I think the examples are illustrative but by no means reflect average taxpayers.

    Reply
    • Financial Samurai

      BJ, I think these are four great examples of what is possible. Now that you know how, you can get motivated to try and reduce your tax bill if you wish.

      Reply
  8. Micah

    Where did the $19k in exemptions come from in your own situation? What was the basis for that number?

    Reply
  9. Nicole

    I just wanted to point out that you incorrectly calculated the retirement savings credit. The credit is calculated by taking 10%, 20%, or 50% (depending on AGI) of the qualified retirement contributions with a maximum possible credit of $2000 for individuals or $4000 for couples.

    Reply
  10. ap999

    One other way is for those of us who live overseas 90-100% out of the year but work for corporations established in the US. What I get is the Foreign Income tax inclusion. I still file my taxes by law but I get a tax credit for any foreign taxes paid on my income. Also if you stay out of the US more than 330 days for work purposes out of the 365 you are not taxed federally up to 97k or so, these limits change yearly with inflation. Combine this with residency in a tax free state, a traditional IRA etc you pay the IRS zero or very close too it.

    Reply
    • Financial Samurai

      Got to love it. Is the Foreign Income tax inclusion for the first $97,000? Do you still have to pay local (foreign) taxes on the amount? Or are you seriously paying no taxes at all?

      Reply
      • ap999

        This will vary company to company. But the current company I am contracted too. Reimburses me for the foreign tax that I have paid. So currently yes I have basically paid 0 federal taxes for the past 2 years. This can all change if my company changes the contract terms or I go work another company that will not reimburse foreign taxes that are paid.

        Reply
      • ap999

        Yes correct, foreign tax laws are different… They will typically not recognize US IRS tax laws. I do have to pay taxes on the full amount, but right now my company reimburses all foreign taxes paid by the employee. So its a win win situation for me currently. Anything over 97k I do have to pay federal taxes on. But that has not been so hard to reduce those, by contributing to a Tira, tax loss harvesting, and any other work related expenses. Also if you do not use the entire tax credit because it is not need, it does carry forward to the following years. For the past two years, I finally used a CPA who specializes on US citizens working abroad. The extra money for a CPA, gives a little more peace of mind since my tax situation requires a little more attention to now. What’s funny is, I paid more to a CPA than in federal and states taxes.

        Reply
        • Financial Samurai

          Gotcha. So a foreigner DOES have to pay local foreign taxes, but the general practice is that every US company employer who you work for abroad will reimburse the taxes you pay up to $97,000. Is that what I’m reading correct?

          To earn $7,900 a year tax free is magical for living practically anywhere in the world except for the major international cities.

          Reply
      • ap999

        This lifestyle is great for single guys like me. For the past 2 years I have been basically living off some of my passive income and military retirement. My day job income is being saved and invested 100%. Traveled new places… also some of the perks of the job are, generally companies will pay for your housing and provide 3 meals a day or some sort of per diem for food. Having no debt helps, also back in the states I do not own a home or even renting a place. Don’t see the need to rent a place or buy a place since I see myself out of the states for a few more years. Not worth the added expenses…

        Reply
        • Ap999

          There is no general practice as to if the company will reimburse the taxes paid or not. The foreign income exclusion only works if one is outside of the US for 330 days out of the tax year. Here is the IRS publication for this rule http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

          If one does not stay out of the country, but does pay foreign taxes still. Federal taxes can be written off against any foreign taxes paid. Or this can be applied to anything above 97k if you meet the 330 days rule.

          There are some great tax benefits for working overseas. I highly recommend it for people to consider it for many reasons, the tax savings, the opportunity to travel near by countries, savings on housing and food(since many companies will provide housing and a per diem). Since I am single, no kids this life style is working great for me. Things could change if I had to be home in the states to take care of family or kids.

          Reply
  11. Laura

    I know when I first was told to save 10% of my income in my 20s I scoffed at the idea. ‘Yeah right I can save that much!’ But I just didn’t know how and I had the media, family, friends reinforcing the fact that times are tough and saving a lot of money means sacrificing living for now. But as I got older I realized that in my 20s I didn’t really know what I wanted or what made me happy and fulfilled. Come to find out, the things that make me the happiest don’t cost so much. Now my husband and I save 33% of our income and this will greatly increase once we move to a lower cost of living area. We have toys: for ex, three iPads each plus brand new iPhones ever two years and the large apple monitors each. Even our three-year-old has two iPads. We have nice cars and live in a beautiful house in a master planned community. We are not deprived at all. My husband is a teacher and I make about $10 less an hour than he does.

    To reiterate the above comments, i wanted to point out that the title states how ‘can’ the average American not pay taxes. The article was meant to show you what is possible so that you can generate ideas for your own sutuation. I would advise those in disbelief to think about what you really want out of life and give yourself permission to spend on these things and give up all the things that aren’t making you happy.

    Also, I wanted to point out that Justin didn’t get two years of AP classes in high school and graduate from college at 19. He also spent two years getting an advanced degree. In addition he had three kids and yet he managed to retire in a little over a decade. He did this without depriving himself is the feeling I get from his blog.

    As a last example, if you’ll read through MMM’s financials — I can’t wait for him to list 2014’s! — you’ll see that his core expenses for a family of 3 are about $1600. He doesn’t live that far from Boulder if I remember correctly. So $1300 for a single person with no kids isn’t that far fetched. (Note: MMM make tens of thousands of dollars a month from his blog for a while now).

    I’m not sure if I’m coming across okay. My point is to encourage those that are discouraged and think that this article applies to ‘other’ people. If you can figure out what you really want in life it could very well apply to you, too. It just takes some effort. You don’t have to feel deprived at all.

    Reply
    • Financial Samurai

      Showing what is possible is a big part of helping people move forward. If people can see examples of real people doing something, then they are much more inclined to take action too.

      Reply
  12. Angela

    I’m way late to the party on this post, but I am totally confused about where these tax payments came from – according to the most recent IRS tax table, the federal tax on a 50,250 AGI in 2014 was $6634 if married filing jointly – where did the $2400 you listed come from?

    Reply
  13. Jill Rivas

    Thank you for this informative post. I just want to share a good source for tax forms and tutorials – PDFfiller. It has a ton of Tax Forms. It helps me fill out a needed form neatly and gives me the option to esign. http://goo.gl/yoGwr2

    Reply
  14. Msk

    Well. I am at lost. My salary last year was $45600 and I was taxed 40%. Why did I bother going to college and grad school?

    Reply
  15. Mr Jackson

    Hello I am Mr Jackson by name. I am here to recommend the effort of Mrs Marry Pery,the C.E.O of MARRY PERY LOAN HOME i was in need of a consolidation loan of $45,000 as soon as I got in touch with the loan company on Wednesday last week and on Friday last week, after all the necessary document was done I got an Alert from my bank (The Royal Bank of Scotland) that a fund was transferred to my bank account, I want everyone on this site to contact Mrs Marry Pery now via email about getting a loan because I got my loan from them and I`m sure they can help you also, I am very happy now, contact them now. via Email:{[email protected]} thank you my best beloved

    Reply
  16. dailyhealthtrends

    This is an informative guide to small business health insurance. Learn about the different plans that can be found, how to choose agents and brokers, as well as how saving on your plan.

    Reply
  17. mccart

    hi

    Reply
  18. Pat Brown

    I am 80 years old. My AGI for 2015 was 17,072. I think taxable was 6772. I have to pay $678.00 tax?

    Reply
  19. William

    Wouldn’t it be better, though, to put the money in a ROTH instead of a traditional IRA? You pay taxes up front, but then your capital gains are tax free.

    Big plus if your company also offers ROTH 401K

    Reply
  20. Susan

    My husband and I are both retired. Is it a good idea to pay off our mortgage or keep it for the tax interest deduction?

    Reply
    • JP

      I’m 34 and trying to decide the same thing. I’m paying a financial planner so I can calculate the pros and cons. With my age its about compounding interest but I also want security of life changes, layoffs, income reduction for less stress, children etc. I would find a fee only financial planner that can calculate all the variables to get the best answer.

      Reply
  21. Brandon

    So someone making $30K a year is paying 10% basically. Putting it into a 401K means you’re paying way more than 10% down the road. Plus it will be ordinary income so you have to pay social security on it. Unlike a capital gain outside that is only 15% and no social security tax. If he’s smart he can grow it after that 10% and pay 0% tax on it.

    Reply
  22. Fayne

    Hi Justin, for your example at the end, can you speak a little more with relevance to qualified dividends? Why are you initially adding that to your income but then later in the illustration deducting it? How do you know to do this? TY in advance!

    Reply
  23. Stan

    vote out liberals

    Reply
  24. JT

    Dang, I might have to change how I invest for retirement.

    Mathematically, it makes sense for me to prioritize Roth IRA since I am 23 and by the time I retire will have a super large nest egg with a high tax rate.

    However, if the government throws around credits to people with lower AGIs, maybe 401k is a better investment. What do you think?

    Reply
  25. Saif

    The extra charges of a government on the residence in the form of general country tax can be eliminate easily with in a seven days according to the rules and regulations of a government,If you write an application with the authentic reasons for a elimination of residence tax and also attached a legal documents of a residence tax pair after that submitted in the government office by the residence tax layers which is helpful for your tax layer to approved the claim of your residence tax in the seven days without any allegations of a government on the application of your residence tax ,Remember don’t write any irreverent reasons in the applications of residence tax you want to submit in the office of government and also don’t attached any illegal or extra document of residence tax which increase the chances to refuse or neglect your claim application ,So keep it in your mind all the instructions and requirements given to you by the tax layer after concerning this kind of matter according to the current policy of government .
    Thanks .

    Reply

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