2021-04-08_How_to_Live_Income-Tax_Free_in_the_USA_pt_2_..._and_Make_Money
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00:00:30.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:34.000 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:37.680 | building a plan for financial freedom in 10 years or less. My name is Joshua Sheets. I
00:00:41.560 | am your host. Today on the show, we're going to talk more about tax planning. This is,
00:00:45.800 | I guess, the third episode in the show. The first one I did was, "Should you cheat on
00:00:49.600 | your taxes to save money?" My answer to that was no. I tried to give two basic arguments
00:00:55.560 | for that. Reason number one is when you evade your taxes, when you cheat on your taxes in
00:01:00.840 | order to save money, you run the risk of prison. If you care about personal freedom, then one
00:01:06.980 | of your primary goals is to not do things that could result in your being sentenced
00:01:11.520 | to prison. But more importantly, number two, I made the argument that if you become a tax
00:01:16.600 | evader, you cheat on your taxes to save money, then you will always be looking over your
00:01:22.640 | shoulder and thus you will probably never reach your full potential. You might have
00:01:27.320 | the potential to be the kind of guy who could build a $100 million business. But if you
00:01:32.200 | are just saying, "I'm not going to pay taxes," then you're going to be building some blue
00:01:36.680 | collar business where you can deal in cash instead of a white collar business where you
00:01:40.120 | can take digital payments, things like that. This is an important thing to consider.
00:01:44.400 | Then we talked about how you can make a lot of money and live in the United States tax-free.
00:01:49.720 | In that show, I talked about the big concept, which is that you have capital gains assets
00:01:55.600 | that are growing and then you borrow against those assets, always remembering that debt
00:02:00.540 | is not income. When you borrow money, you have spendable cash, but it is not income.
00:02:05.560 | Forgive the thunder in the background if you're hearing that. My mic does a pretty good job
00:02:08.800 | with noise canceling, but I'm recording in the midst of an extremely loud thunderstorm
00:02:13.400 | and the children are in bed. I'm a single father today. My wife is at an appointment.
00:02:22.840 | I'm a single father working from home while caring for her children recording in the middle
00:02:26.080 | of a thunderstorm. That's where we're at today.
00:02:31.240 | I talked about how, yes, the basic concept of how you can live in the United States,
00:02:35.320 | make a lot of money, have capital gains assets, and then borrow money against them because
00:02:39.840 | debt is not income. Today I want to pivot and I want to talk about making less money.
00:02:45.240 | I'm going to record a separate show where I talk about where tax savings should be on
00:02:49.920 | your list of priorities. Spoiler alert, it should not be your number one thing. There
00:02:54.540 | is no 100% tax bracket. Generally, it's always worth it to make a little bit more money,
00:03:01.280 | especially if you make that money in an easy way instead of a sweat of the brow type of
00:03:05.160 | way. At the end of the day, taxes are only one factor, not the most important factor.
00:03:12.240 | I think you're better off to target your growth of your wealth and making a lot of money as
00:03:16.600 | long as you can do it in an efficient way rather than paying zero tax.
00:03:22.040 | It's useful to think about paying zero tax. I'll also record a separate show where I talk
00:03:26.680 | about paying zero tax for moral reasons, tax resistance, because this is something I've
00:03:32.760 | been interested in for a long time and it's going to be something we talk about in today's
00:03:35.800 | show. The number one reason why you might want to say, "I'm determined to pay no tax,"
00:03:42.240 | is because you have some kind of moral reason to pay no tax. It's not a matter of the numbers,
00:03:48.280 | but you're saying, "I refuse to pay tax." A classic example of this is those who are
00:03:52.520 | war tax resistors in the United States. There can be many other good valid reasons for you
00:03:56.680 | to protest against taxes. Tax protests and tax strikes are a fundamental effective part
00:04:04.280 | of an activist's arsenal, of an activist's toolkit.
00:04:09.000 | Way back in episode 17 of Radical Personal Finance, I interviewed a man named David Gross,
00:04:14.360 | who is an author of a book called 99 Tactics of Successful Tax Resistance Campaigns. We
00:04:20.200 | talked about whether you should stop paying taxes on moral grounds. David Gross has a
00:04:25.120 | good article that I'm going to be using as we introduce this show to explain how, if
00:04:30.440 | you want to pay zero taxes, you can accomplish that by lowering your income.
00:04:36.160 | When we talk about this, it should be obvious to you. We all know that there are lots of
00:04:40.320 | people who live in the United States who pay no federal income taxes. Many estimates are
00:04:45.360 | that perhaps half of the population pays no federal income taxes. Now, in fairness, there's
00:04:50.960 | a lot of confusion about this, because while half of the population pays zero federal income
00:04:57.160 | taxes, that doesn't mean that half of the population pays no taxes.
00:05:02.240 | When we talk about income taxes, we're always balancing these three different tax systems
00:05:06.360 | that are the most, that are the tax systems that grab most ordinary people. They are,
00:05:11.600 | number one, income taxes on the federal, state, and sometimes local level, but we just talk
00:05:16.400 | here at this show mainly about federal level taxes. Number two, it is employment taxes,
00:05:23.080 | which are the taxes that you pay on your wages in order to support the Social Security and
00:05:27.960 | Medicare systems. Number three is capital gains taxes. All of these taxes work together.
00:05:35.000 | You pay all of them, depending on how your financial affairs are structured, but the
00:05:39.080 | tax planning that you do is different for each of them.
00:05:42.960 | While it's true to say that half of the US population doesn't pay federal income
00:05:48.640 | taxes, it's not true that half the population doesn't pay taxes, because what that half
00:05:53.040 | of the population pays a lot of are employment taxes, because employment taxes wind up being
00:05:59.680 | what's called a regressive tax system, whereas federal income taxes are a progressive tax
00:06:04.840 | system. A regressive tax system is a tax system that imposes a greater burden of taxation
00:06:11.080 | upon lower income people, whereas a progressive tax system is a tax system that imposes a
00:06:16.840 | greater burden upon higher income people.
00:06:20.240 | You have the employment tax system, which is functionally basically a regressive tax
00:06:24.600 | system because of the Social Security wage base. On Social Security taxes as part of
00:06:30.160 | the employment tax system, it's a regressive tax system. Remember that as of 2021, the
00:06:37.040 | Social Security wage base is $142,800. If you are an employee, you pay 6.2% of your
00:06:44.560 | wages up to the first $142,800 of income. You pay 6.2% on Social Security, and then
00:06:52.960 | your boss pays another 6.2% for you. If you're self-employed, you pay 12.4% of your first
00:06:59.600 | $142,800 of self-employment income. That's a maximum tax of $17,707. If you're self-employed,
00:07:09.440 | $8,853 if you are an employee, but that's the maximum for Social Security.
00:07:14.520 | Now Medicare, it's a bit more complicated because Medicare has two numbers. If you're
00:07:18.800 | an employee, you pay 1.45% of your wages up to the first $200,000 of wages. Then above
00:07:26.760 | $200,000, you pay 2.35% of your wages in Medicare taxes. Of course, if you're self-employed,
00:07:33.920 | then you pay the 2.9% on the first $200,000, and you pay 3.8% on everything above $200,000.
00:07:42.280 | With your Social Security taxes, you have a regressive tax system. For lower wage earners,
00:07:47.000 | that's going to be a big number. If you're making a million dollars and you pay the max
00:07:50.780 | total as an employee of $8,853, it's not that big of a deal in terms of your overall taxation.
00:07:57.120 | For Medicare, you have something of a flat tax system where it's just as flat 1.45% up
00:08:02.520 | to $200,000, then it's 2.35%. For income taxes, you have a highly progressive system where
00:08:08.400 | lower wage earners pay a low rate, high wage earners pay as high as 37% under the current
00:08:13.600 | tax law, possibly increasing. Then for capital gains taxes, you have something more of a
00:08:18.280 | flat system. You have a 0% capital gains tax bracket, a 15% capital gains tax bracket,
00:08:23.760 | and a 20% capital gains tax bracket, but a little bit flatter than some of these other
00:08:28.040 | brackets. You're always managing these three tax systems simultaneously, and it's important
00:08:33.680 | that you specify which particular tax system are we talking about. Each of them has their
00:08:39.880 | own issues. Let's talk today about federal income taxes. How can you live in the United
00:08:46.800 | States and reduce your federal income taxes to zero? Well, the answer is don't make very
00:08:51.520 | much and then use all of the applicable credits and deductions to lower your overall taxable
00:08:57.440 | burden. I'm going to begin by reading some portions of David Gross's article on this
00:09:02.920 | subject. Remember, David Gross is a war tax resister, and so his article is called "How
00:09:08.040 | to Resist the Federal Income Tax by Getting Under the Tax Line." Introduction. This guide
00:09:13.200 | shows you how to stop paying federal income tax in the United States legally and by the
00:09:18.240 | book, by keeping your taxable income low and by qualifying for certain credits. I call
00:09:23.400 | this the D.O.N. method, short for don't owe nothing. This guide is for people who are
00:09:28.960 | considering tax resistance but aren't sure how to go about it. It may be useful to people
00:09:33.440 | who simply want to pay less federal income tax, whatever their motives. Why I wrote this.
00:09:40.840 | Here's a brief history of how I got interested in this subject and why I thought it was important
00:09:43.800 | to create this guide. In March of 2003, I decided to stop paying federal income tax
00:09:48.760 | because I did not want to fund the government's activities. I decided to do this by lowering
00:09:53.680 | my taxable income and by taking credits that reduced my income tax burden to zero, what
00:09:58.720 | I'm calling the D.O.N., don't owe nothing method. I was surprised to learn that I could
00:10:03.320 | earn quite a bit of income and live very comfortably without paying federal income tax and without
00:10:09.200 | having to battle the IRS. I could play by their rules and still pay nothing. And then
00:10:15.880 | he goes on and talks about some frequently asked questions that would be of interest
00:10:19.440 | to people who are interested in tax resistance. I'll link to the article in the show notes,
00:10:24.940 | but let's talk about the practical of it. How the D.O.N. method works. The D.O.N. method
00:10:29.000 | takes two paths. The federal income tax doesn't tax all of your income, just your taxable
00:10:34.060 | income. Path number one is to remove as much of your income as possible from the taxable
00:10:39.020 | income category. Once you've done that, you'll have some taxable income and some amount of
00:10:43.940 | tax owed on it, but you can offset this tax or even reverse it into a refund by using
00:10:49.600 | various credits. Path number two is to qualify for these credits. You use those paths to
00:10:54.860 | figure out how much money you can earn and spend without owing income tax. Then you look
00:10:59.920 | at your lifestyle and your goals and adjust them if necessary so that you can live within
00:11:04.040 | your means at that income level. The remainder of this guide covers this in greater detail
00:11:08.480 | by reading this guide. You will be able to investigate for yourself if the D.O.N. method
00:11:11.920 | will work for you. Path one, get your income out of the taxable income category. When you
00:11:18.500 | fill out a 1040 form, your income cascades through several levels, changing a little
00:11:23.960 | each time from income to total income, then to adjusted gross income, and finally to taxable
00:11:30.960 | income. Each stage gives you the opportunity to prevent some of your income from being
00:11:35.080 | taxed. From income to total income. Income is just whatever money you brought in during
00:11:41.000 | the year, but income according to the IRS is not so simple. Some income is invisible
00:11:46.320 | to the tax collector. For example, if you had money deducted from your paycheck to go
00:11:50.360 | into a 401k retirement account or a health savings account, the IRS doesn't include
00:11:55.480 | that money in your income. There are other ways to shield your money from taxes. For
00:11:59.920 | example, at my last job, I had money withheld from my paycheck to buy my transit passes,
00:12:04.560 | and that money also did not register as part of my total income. Keep your eye out for
00:12:08.940 | opportunities like this. Ask your employer what pre-tax contributions you could make.
00:12:13.920 | Consider switching to a variety of health insurance that qualifies for health savings
00:12:17.040 | accounts, and then shelter some of your income by saving it to pay health costs. Your total
00:12:22.020 | income also includes any capital gains you made during the year. For instance, if you
00:12:26.080 | sold stock or property at a profit, you can also subtract some capital losses when you
00:12:31.160 | calculate your total income. If you run your own small business or do gig economy work,
00:12:36.120 | this profit or loss is also part of your total income. Some tax resistors find that having
00:12:40.620 | such a business helps them to regulate income, and years when income gets too high, they
00:12:45.100 | invest more money in their business and take a business loss or reduce their business profit.
00:12:50.160 | You can't run your business at a loss every year though, or the IRS will decide that what
00:12:53.600 | you've got isn't a business as much as a hobby and your deduction may go away retroactively.
00:12:58.640 | Among the other things that are part of your total income are interest, dividends, and
00:13:02.440 | unemployment compensation. This is just a brief introduction to some of the ways your
00:13:06.600 | total income is calculated. I haven't gone into it in much detail because I'm not really
00:13:10.680 | qualified to go into specifics about things like business expenses and such a discussion
00:13:14.200 | would be too long for this guide. From total income to adjusted gross income. Adjusted
00:13:19.920 | means lowered because all of the adjustments are deductions, so use as many as you can.
00:13:25.680 | Do use your "adjusted gross income" to calculate some of the credits that I cover
00:13:30.320 | in Path 2 below. And in general, the lower your adjusted gross income is, the better.
00:13:36.360 | One of the best of these deductions is for a tax-deferred individual retirement account
00:13:40.040 | (IRA). Not only because you can deduct the money you put in, typically up to $6,000 from
00:13:44.840 | your total income, but because when you put money into a retirement account you can qualify
00:13:48.480 | for a generous credit, which I'll cover in the Path 2 section below. Be aware though
00:13:52.880 | that there are forms of IRA, such as the Roth IRA, that aren't tax-deferred and that won't
00:13:57.680 | lower your adjusted gross income. Ask about the tax ramifications before you invest. If
00:14:02.480 | you run your own business or are otherwise self-employed, you may be able to take deductions
00:14:06.200 | here on things like your health insurance costs. Depending on the state of the tax law,
00:14:10.600 | you may be able to take this as a simple business expense or as a separate tax line item, and
00:14:14.280 | part of the cost of your payroll taxes. Other deductions are available for interest paid
00:14:18.600 | on student loans and for educational supplies bought by teachers. These aren't the only
00:14:23.080 | deductions, and I haven't covered them in much depth or detail. Just an overview.
00:14:27.520 | From Adjusted Gross Income to Taxable Income
00:14:30.640 | There is one remaining deduction, either the itemized deduction or the standard deduction.
00:14:35.400 | Once you subtract this, you are left with your taxable income. By itemizing, you can
00:14:40.000 | take deductions for things like charitable donations, medical expenses, state taxes,
00:14:44.600 | and such. But for most people, the standard deduction is higher than their itemized deductions
00:14:48.760 | would be, so they're better off taking the standard deduction instead. Once you've
00:14:53.120 | made this deduction, you have your taxable income, and you can look in the tax table
00:14:57.000 | to find out how much you're supposed to pay. But don't get out the checkbook yet,
00:15:00.680 | because you're only half done.
00:15:01.680 | Now let's talk about Path 2, Use Credits to Eliminate Your Tax Liability
00:15:06.160 | Many tax credits exist. Credits are not deductions that you subtract from your income. Instead,
00:15:10.640 | you subtract them directly from the tax you would otherwise owe. For example, if the
00:15:14.480 | tax table says you owe $750, but you qualify for a $500 credit, you subtract that credit
00:15:20.920 | directly from the tax. $750 minus $500 equals $250. One credit is for your education expenses.
00:15:28.960 | Another is for any income tax you've paid to a foreign government. Another is for your
00:15:32.600 | child care or dependent care expenses. You also get a per-child child tax credit, and
00:15:37.800 | can also take a credit for any adult dependents you have. My favorite credit is the Retirement
00:15:42.160 | Savings Contribution credit. Remember how, when you put money into a tax-deferred retirement
00:15:46.640 | account, you were able to deduct it from your income before you calculated your tax? Now
00:15:50.920 | it gets better. You can take a percentage of the amount you put into retirement accounts
00:15:54.500 | as a credit as well. If your adjusted gross income is low enough, that percentage is 50%,
00:15:59.960 | and your credit is as high as $1,000, which cuts your income tax to zero. The Earned Income
00:16:04.900 | Tax Credit is a special creature. Most credits allow you, at best, to lower your tax to zero.
00:16:10.340 | The Earned Income Tax Credit allows you to lower your tax below zero, so that the government
00:16:14.600 | actually owes you money. This sort of credit is called a refundable credit. In order to
00:16:19.320 | qualify for the Earned Income Tax Credit, your adjusted gross income must be very low,
00:16:24.720 | but you must have earned some income during the year. It's easier to qualify if you have
00:16:28.180 | at least one dependent child. Millions of people qualify for the EITC, but it does typically
00:16:32.960 | require having a very low income, lower than is strictly necessary for the DON method.
00:16:38.040 | Now he goes on and gives some additional benefits that listeners of this show will be aware
00:16:43.400 | of. But let's use his example, and then I'll give you some ways to turbocharge these results.
00:16:48.040 | So here's his example. Remember, the goal here is to pay zero taxes while living zero
00:16:52.240 | - excuse me - the goal here is to pay zero federal income taxes while living in the United
00:16:57.080 | States. Example. By September, Joe "Tax Me Not" had earned $39,000 at his job. $6,000
00:17:04.760 | in 401(k) contributions were deducted from his wages, along with $3,500 for his health
00:17:10.320 | savings account, $400 for pre-tax commuter checks, $3,060 for FICA tax, and $2,000 for
00:17:17.600 | federal income tax. Then he decided he didn't want to pay federal income tax anymore, and
00:17:22.480 | he began to try to get that $2,000 back by using the DON method. He quit his job and
00:17:28.200 | started a business doing freelance manuscript editing. He went through the paperwork and
00:17:32.240 | fees involved to get a business license, and he put some advertisements in magazines catering
00:17:36.200 | to authors and scriptwriters. By the time he finished with this, he'd spent $2,750 on
00:17:41.520 | his new business, but it started to pay off. He got his first of several freelance jobs
00:17:46.160 | in November, and his first check from a happy client - $1,800 - arrived just before the
00:17:51.300 | end of the year. He also sold some stock he'd bought. This brought in $1,250 in income,
00:17:57.260 | but he'd bought the stock for $5,000, so he really got hosed - $3,750 in losses. He
00:18:02.960 | can take $3,000 of those losses as a deduction this year, and save the leftover $750 for
00:18:08.880 | next year. Income - $39,000. Less 401(k) deduction of $6,000. Less commuter checks of $400. Less
00:18:18.360 | business expense of $2,750. Plus business income - $1,800. Less capital loss - $3,000.
00:18:26.920 | Equals $28,650 of total income. Joe's been lowering his expenses because he knew he might
00:18:32.520 | quit his job, but he's still kind of strapped for cash. He needs to put $6,000 into an IRA
00:18:37.860 | to make the DON method work for him. He does some research and discovers that the IRS will
00:18:42.560 | let him take credit for putting money into an IRA before he actually makes the contribution.
00:18:47.740 | As long as he puts the money in before the tax filing deadline next year. So he declares
00:18:52.400 | the $6,000 contribution on his tax return in February, but waits until he gets his refund
00:18:57.420 | check from the IRS before he actually makes the contribution.
00:19:02.000 | Total income - $28,650. Less health savings account contribution - $3,500. Less IRA - $6,000.
00:19:10.520 | Equals $19,150 of adjusted gross income. Joe takes an ordinary standard deduction because
00:19:16.900 | when he calculated his itemized deductions, they didn't amount to much. Adjusted gross
00:19:20.720 | income - $19,150. Minus standard deduction - $12,200. Equals $6,950 of taxable income.
00:19:29.080 | Joe looks in the tax table for the tax on $6,950. It's $695. He then fills out the
00:19:36.560 | retirement savings contributions credit form. Because his adjustable gross income is $19,250
00:19:42.920 | or below, he can take 50% of the first $2,000 that he put into retirement accounts, like
00:19:48.260 | his 401k and IRA, as a tax credit. This is a $1,000 credit. Alas, the IRS won't let
00:19:54.440 | you take more of this credit than you owe in taxes, so it only eliminates the tax rather
00:19:58.660 | than converting it into a refund. However, Joe is satisfied and claims victory.
00:20:04.080 | Tax on $6,950 is $695. Less a retirement savings contribution credit of $695. Equals $0 of
00:20:12.560 | tax owed. Joe files his return and soon gets a check for $2,000 from the federal government.
00:20:18.080 | The $2,000 that had been withheld from his wages for income tax. He remembers to put
00:20:22.380 | that check into his IRA as part of his $6,000 contribution. Over the course of the year,
00:20:27.080 | he put $12,000 away for retirement, put $3,500 away to pay his medical bills (or for retirement
00:20:34.760 | if he stays healthy), and spent $2,750 to get his business off the ground. Subtracting
00:20:40.560 | the FICA that was taken from his paycheck, that's left him with $21,490 to spend however
00:20:45.780 | he wants, plus a business, plus $12,000 invested to spend in his old age, and $3,500 to cover
00:20:52.320 | his health insurance deductible if need be. Not too shabby. Wages $39,000, plus stocks
00:20:58.680 | sold $1,250, plus business earnings $1,800, less retirement savings $12,000, less health
00:21:05.280 | savings $3,500, less business expenses $2,750, less FICA $3,060, equals $20,740 free and
00:21:14.600 | clear. Joe figures he can live on $20,740 pretty easily, and can even save up a little
00:21:20.640 | bit for when he runs out of that rotten bubble stock and he has to squeeze things a little
00:21:24.400 | tighter. He figures he'll probably be pretty good at living on the cheap by then though.
00:21:28.480 | Joe's cousin, Jane, earns only $23,000 a year. By the time her taxes have been withheld
00:21:33.580 | from her wages, including about $1,200 in federal income tax, she has less free and
00:21:38.560 | clear take home income than Joe does. She can't believe that Joe, who brought in much
00:21:42.840 | more money than she did last year, and has all that savings to show for it, doesn't
00:21:47.400 | have to pay any federal income tax at all. She's going to go through the numbers herself
00:21:51.280 | and see if maybe she could try the D.O.N. method too.
00:21:54.160 | So there's the example from David Gross's article on how to resist federal income taxes
00:21:59.480 | by getting under the tax line. I think it's a good place to start because it demonstrates
00:22:03.480 | some of the principles involved. Again, separately I'll talk about how much should you prioritize
00:22:08.760 | this. Someone who's not trying to resist federal income taxes, by the way, in the way that
00:22:14.320 | David Gross is, would clearly say, "Well, wouldn't it be better to go make $100,000?"
00:22:18.160 | Well, perhaps. But by understanding this, you can understand how to adjust it.
00:22:24.080 | Now let's use some other examples because depending on your personal situation, these
00:22:27.960 | numbers may be quite modest or they might be much larger. If I were a single man like
00:22:33.420 | I believe David Gross is, he's never commented about being married or having children. If
00:22:37.280 | I were a single man, I think I could live very comfortably on that amount of money.
00:22:42.120 | I wouldn't live in a house. I would probably live in an RV. I'd live kind of a nomad lifestyle
00:22:45.960 | living modestly. But there are lots of people living very comfortably on $1,500, $2,000
00:22:50.280 | a month, seeing the world, et cetera, traveling all around. And that's the kind of thing that
00:22:53.920 | I would probably do if I were in his situation. However, I'm not. But because I'm not, I have
00:22:58.600 | a different set of numbers. So let's pretend that I wanted to live in the United States,
00:23:03.840 | but I was very concerned for moral reasons about paying $0 of tax. I would say, "Listen,
00:23:10.200 | I'm not going to earn a million dollars. I'm not going to go black market. I'm not going
00:23:13.420 | to not pay tax. But I want to live in the United States and I want to, for moral reasons,
00:23:17.640 | pay $0 of tax. What could I do?" Well, remember, the big difference between David and me is
00:23:23.200 | I have four children. And so with a $2,000 child tax credit, all of a sudden now my children
00:23:29.680 | can help me to reduce my taxable burden significantly. So the numbers would change significantly.
00:23:35.360 | So let's play a little game here. Let's begin with this. Let's say that I have a business
00:23:42.680 | or a series of businesses that generate for me a total of $150,000 of gross profit from...
00:23:50.480 | Excuse me. Let me rephrase that. Let's assume that I have a couple of businesses that generate
00:23:56.080 | for me $150,000 of gross revenue into the business, gross revenue. And let's assume
00:24:03.280 | that I've been thoughtful about the kinds of businesses that I engaged in. And I chose
00:24:08.200 | the kinds of businesses that allow me to generate my income in a very pleasing way and that
00:24:14.040 | allow me to shelter the kinds of expenses that are important to me to shelter. Let's
00:24:19.480 | say, for example, that my wife and I, we have a real estate agency. And she has a real estate
00:24:26.120 | license and I have a real estate license. And we're real estate investors. And so now,
00:24:30.560 | because we spend quite a lot of time driving around to show property to clients, we wind
00:24:34.600 | up doing a decent amount of entertaining. We can use our meals and entertainment expenses
00:24:41.560 | with our clients to generate more business. We can do all kinds of interesting things.
00:24:45.480 | We could use our home once a year for a big business party and deduct those expenses.
00:24:51.120 | Our cell phones and our computers and a major portion of our mileage is now deductible.
00:24:56.160 | And we've created something that allows both of us to work in the business. And so now,
00:25:00.000 | if we go to a real estate agent seminar in Orlando, we can go to a seminar on Thursday
00:25:06.600 | and Friday. We can stay over the weekend and go take our children to Disney World, make
00:25:11.800 | sure we have meetings scheduled on Monday morning. We could fly home on Tuesday or drive
00:25:15.000 | there with take our children. Now we have ample business deductions. All the kinds of
00:25:19.760 | things that we've talked plenty about here on Radical Personal Finance.
00:25:23.800 | So let's assume that I have $150,000 of gross revenue, but that I have $30,000 of business
00:25:31.300 | deductions, business expenses that are associated with generating that revenue, ordinary necessary
00:25:36.240 | expenses, what the IRS would call them. So that drops my net profit from my business
00:25:41.600 | from $150,000 to $120,000. Let's assume now that my wife and I put into, let's say we
00:25:48.960 | set up a solo 401k and she makes contributions to that and I make contributions and we contributed
00:25:54.320 | a total of $25,000 to our 401k for our real estate business that we run together. And
00:26:01.040 | so now we've taken our $120,000 of net profit and I've lowered that with my personal income
00:26:08.360 | from $120,000 to $95,000. So we have now $95,000 of wages coming into our household.
00:26:17.480 | So the first thing to keep things very simple that we do is let's assume no other deductions
00:26:21.960 | at the moment, right? We could do a health reimbursement arrangement program. We could
00:26:26.200 | set that up in our business that would allow us to deduct all of our kids' medical expenses,
00:26:31.280 | their orthodontia bills and all kinds of stuff with a health reimbursement arrangement program.
00:26:35.120 | We could participate in a health savings account. We could do a couple other things.
00:26:38.240 | But let's skip most of that. We have $95,000 of wages and we just simply have a straight
00:26:44.800 | $95,000 of adjusted gross income. Well, then we take from that the standard deduction for
00:26:52.080 | a married couple filing jointly, which is $24,800. And you subtract $95,000, you subtract
00:26:59.520 | out $24,800, which leads us with a household taxable income of $70,200. That's our household
00:27:06.920 | taxable income. We now take that taxable income over to the tax chart and we wind up with
00:27:13.360 | $8,032 of tax owed. So the tax chart says that if you have a taxable income for a married
00:27:20.920 | couple filing jointly of $70,200, you owe $8,032 of tax. Now in this example, with this
00:27:29.820 | high of an income, some of the other things like the earned income tax credit and other
00:27:35.000 | things won't be so significant. But remember, I've got four children, so I can take a child
00:27:39.720 | tax credit of $2,000 per child. That's a total of $8,000. And now I subtract $8,000
00:27:46.480 | from my total taxable income, sorry, from my total tax of $8,032, which leaves me with
00:27:52.080 | a total tax due of $32. So that's pretty close to zero. If I scratched around and dropped
00:27:59.400 | my income from $95,000 to $94,000, then I could probably do a little bit better. Just
00:28:04.000 | was looking for a simple math. And so this can show that I can actually live in the United
00:28:10.400 | States and if I'm thoughtful about how I put all these things together, notice I emphasized
00:28:15.720 | having a kind of business that allows me to shelter business deductions that are the kinds
00:28:20.800 | of things that I would need to, that would make for a pleasing lifestyle. I can, and
00:28:26.560 | then I use retirement accounts to put money into a retirement account, which I could put
00:28:30.200 | more than $25,000 if I structure things properly. I can shelter a significant amount of money
00:28:36.440 | from tax and wind up paying no federal income taxes. So this is a powerful thing. The business
00:28:41.960 | is not required, right? If I just had $95,000 of wages working for someone, maybe I have
00:28:46.480 | a, maybe I'm an accountant, right? And I work and my wages are $95,000. Well, in my situation,
00:28:51.640 | I would wind up owing $0 of federal income tax. And so this is how you do it. And so
00:28:56.000 | if you're interested in paying $0 of federal income tax, perhaps you have on moral grounds,
00:29:01.280 | something like, like David does to be a war tax resistor. This is how you live in the
00:29:05.600 | United States and pay $0 of federal income tax. Now, how do you turbocharge this? Well,
00:29:11.360 | I've already mentioned businesses. The way that you turbocharge this is instead of working
00:29:15.960 | at a job that you don't like, that doesn't give you the opportunity to have many business
00:29:19.760 | expense, you start your own business. You start a family business. Maybe you're working
00:29:24.480 | at a salary. Your wife runs an at-home business. You start something that incorporates the
00:29:28.080 | two of you. You start the kinds of businesses that provide you with the kind of lifestyle
00:29:33.600 | that you want to live. When I think about it with my personal values, I think about,
00:29:38.440 | all right, I'm going to start a real estate business where we have a small real estate
00:29:42.200 | agency, where we sell real estate. We're also going to have a rehab business because now
00:29:47.160 | that allows my wife and me, we both have business miles. We both have business lunches. We both
00:29:53.080 | have cell phones. We both have computers. So this covers a lot of our basic needs there.
00:29:57.920 | That allows us because we both work for the same business, we can travel together. We
00:30:01.000 | can go to seminars. We can go to educational events. We can go to promote our services.
00:30:06.320 | We would start a number of different things that provided us with the lifestyle that we
00:30:09.520 | needed while also still being significantly profitable. If you're thoughtful about the
00:30:13.720 | kind of business that you start, then you can use it and have quite a lot of completely
00:30:18.640 | legitimate business deductions for your household.
00:30:23.360 | The second way that you turbocharge this is by maximizing your retirement contributions.
00:30:27.280 | Again, back to your own business. Your own business run properly with a properly structured
00:30:32.560 | solo 401k, which can be a husband and wife solo 401k as well, can allow you to exempt
00:30:40.480 | up to basically $50,000 a year, a little over $50,000 a year from your wages. So you can
00:30:45.840 | put a lot of money into retirement accounts to gain the tax deferral. So that's also a
00:30:50.400 | really useful thing to keep in mind.
00:30:52.760 | And then you optimize this on the expense side by saying, "How can we live really well
00:30:57.900 | on less money?" Now, a lot of people wouldn't consider $95,000 of wages a little bit of
00:31:03.920 | money, but still, it's probably less than your capacity. So if you're focused on paying
00:31:08.080 | a low income, sorry, a low amount of tax, you will want to get good at other things.
00:31:12.820 | If you were David Gross and you were living low, you would want to figure out a lifestyle
00:31:16.800 | that allowed you to generate the things that you need at a relatively low cost. How can
00:31:22.280 | you do that? Well, you can choose some kind of unusual lifestyle. You can choose to lower
00:31:26.320 | your housing expenses by living in some kind of shared housing. Maybe you work for a farmer
00:31:33.800 | and the farmer says you can have the little apartments out on the backside of the barn
00:31:38.520 | and that gives you a comfortable little apartment and that's part of your overall wages. And
00:31:42.240 | because you're living there for the convenience of the employer to care for the farm when
00:31:45.720 | the farmer is not there, you don't have to pay tax on the value of that housing receipt.
00:31:49.300 | That would be an example. Perhaps you choose a non-traditional living situation. You live
00:31:53.520 | in an RV, right? You're a van dweller. You live in an RV. You travel around and this
00:32:01.240 | just lowers your overall costs significantly. Perhaps you live in a paid-off house where
00:32:06.720 | maybe your dad died and left you a house that you live in and it's totally paid off and
00:32:10.280 | so your living costs are quite low because of that. Maybe you live in a sailboat and
00:32:15.040 | so you don't have many costs there and then you figure out how to keep your overall sailing
00:32:19.720 | expenses fairly low. I mean there's so many things that you can do. You live in a tent
00:32:22.680 | in the woods for crying out loud. There's so many things that you can do to keep your
00:32:26.760 | expenses low on housing. Then you look at your other expense categories. You minimize
00:32:33.060 | utility costs through energy efficiency. You minimize your phone costs or your internet
00:32:38.680 | costs by going to the library. A guy like David Gross, single guy, he could live in
00:32:42.400 | a modest apartment. He could work from the apartment, work from a coffee shop, work from
00:32:45.800 | a library and have relatively low communications expenses while still building his business.
00:32:51.640 | Perhaps you grow a big garden. Maybe you live on a farm and you grow a big garden that provides
00:32:56.840 | your family with a lot of food and you raise animals and you butcher your own animals.
00:33:00.200 | Now instead of to provide for your four children, instead of needing to spend $1,500 a month,
00:33:05.360 | maybe you spend $250 a month but the rest of your labor is just simply non-taxable labor
00:33:11.840 | for your own personal household. You're cutting wood to heat your house with. You are raising
00:33:16.680 | your own food, etc. So you can keep your expenses low. So this is a really good solution as
00:33:21.760 | well. So this is how you turbocharge it if you're committed to living in the United States
00:33:26.960 | and paying no tax, this is a way that you do it. Now there are other things that you
00:33:30.720 | can do as well. We've talked about finding income that just simply doesn't exist for
00:33:35.560 | tax purposes such as income from the sale of a personal residence. If you were wealthy,
00:33:40.680 | municipal bond income. There are always a few different kinds of income that you can
00:33:45.600 | do if you're committed to paying no tax. And that's where I want to leave things for now.
00:33:50.840 | Now should you do this? It depends on your motivation. We'll talk about the philosophy
00:33:56.560 | in a separate show. But you should know that this is available to you. What is your big
00:34:01.040 | problem in all of this? Your big problem is that here we've really only dealt with your
00:34:06.520 | federal income tax. We haven't dealt with that big bite of employment taxes. That would
00:34:14.480 | be your big cost. Because on that same $95,000 of wages that I used the example, that $95,000
00:34:20.800 | of wages, if I generated $95,000 of wage, I would have a $32 tax bill, $32 of taxes
00:34:26.800 | owed. However, if I was an employee generating that, I would wind up with a total tax bill
00:34:34.440 | of $7,267 by generating that $95,000 for employment taxes, paying for Medicare and
00:34:42.400 | Social Security. If I were self-employed on that same $95,000, I would wind up with a
00:34:49.680 | $14,000, oops, excuse me, did the math wrong, 15.3%. I would wind up, yeah, $14,535. So
00:34:59.080 | that would be my biggest tax bill. How do you avoid employment taxes? Well, you either
00:35:05.680 | have to not create wages of any kind. So how do you do that? Well, you have a business
00:35:11.760 | that doesn't generate wages. People will minimize their wages with an S-corporation, where you
00:35:17.000 | pay out a combination of wages and dividends. So you could lower that with an S-corporation,
00:35:23.520 | but you can't eliminate it. That's not going to work. Or you can generate income that's
00:35:29.440 | not wage income, trading, capital gains, profits, or you can leave the country. Or you can work
00:35:36.660 | for an offshore corporation when you've left the country. Then you can eliminate your employment
00:35:41.360 | taxes. Just always keep in the back of your mind, you've got these three different tax
00:35:45.560 | systems that you're dealing with, where you're kind of fighting among the three of them.
00:35:50.280 | But that's how you live in the United States and earning a varying amount of income, pay
00:35:55.120 | no taxes. Thanks for listening. As I go today, let me remind you that I am setting up a new
00:36:02.880 | text messaging system. If you'd like to text me, by the way, you're welcome to ask me any
00:36:06.560 | question. So far, I've responded to 100% of listeners who've sent me a question. So if
00:36:11.800 | you'd like to text me your question or comment about the show, send me a text message at
00:36:15.200 | 561-468-3158. I'm also going to be using the text message system to notify you about my
00:36:21.360 | travels, notify you of forthcoming meetups, things that I'm doing, and just to chat with
00:36:25.200 | you and hang out with you. So if you'd like to do that, go and send me a text message
00:36:28.120 | now at 561-468-3158. Again, text me 561-468-3158. Thank you to those of you who've been leaving
00:36:35.760 | reviews for Radical Personal Finance on the various podcast platforms. So good to see
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00:36:50.280 | me five stars, four stars, two stars, one star, don't care, whatever you want, and a
00:36:53.880 | quick one or two sentence comment about what you like about the show, and I would be so
00:36:57.440 | grateful. Be back with you soon.