Paying Zero Taxes Legally
The statistics show that a substantial number of Americans owe no taxes to the federal government each year. If you have a heavy tax burden and are looking for ways to reduce it, you may wonder how some people manage to pay no taxes at all. In many cases, though, these people pay no taxes because their incomes fall below the required threshold. If your income is less than the standard deduction for personal taxes, you do not need to pay any taxes. The Tax Cuts and Jobs Act dramatically increased the standard deduction in 2018. It is now a little over $25,000 for spouses who file taxes jointly and $12,000 for single taxpayers.
At the opposite extreme are a much smaller group of Americans who are extremely wealthy. You only need to pay income tax based on earned income or assets that are sold for a profit. Income tax does not apply to borrowed money. People who are very rich thus can buy long-term assets that appreciate in value over time, while borrowing against them for their regular expenses. This combination of asset ownership and borrowed income shields them from any tax obligation. Other strategies used by the wealthiest people in the U.S. include buying tax-free municipal bonds and contributing money to individual retirement accounts, which are not subject to taxes.
Taxpayers With Children
If you have a relatively low income and several dependent children, you may qualify for a cluster of tax credits that may negate your tax obligation. These credits include the child tax credit and the child and dependent care tax credit, which are adjusted according to the family’s income and the number of children. The earned income tax credit also increases if you have children. These credits are not deductions, so a taxpayer can take them together with the standard deduction. If the total amount of the standard deduction and these tax credits is greater than their income, they will not need to pay any taxes. They may even get extra money to supplement their income, since the child tax credit and the earned income tax credit are refundable. (The child and dependent care tax credit is not refundable.)
Taxpayers in Retirement
People in the later stages of their lives may benefit from additional deductions and tax advantages specific to them. If they do not have a substantial income at the time that they retire, they may not have any tax obligation left over once they apply deductions and other tax breaks.
Eliminating Taxes Through Itemized Deductions
If you have many itemized deductions, you can claim those deductions instead of the standard deduction. A very small percentage of taxpayers will have so many itemized deductions that these will negate their tax obligation. Some common examples of itemized deductions include the home mortgage interest deduction, the casualty loss deduction, deductions for charitable donations and certain medical expenses, and a deduction for up to $10,000 in non-federal taxes. People who make large donations to charity or who accumulate substantial uninsured medical expenses are perhaps the most likely groups to pay no taxes because of their itemized deductions.
