The_people_who_pay_zero_federal_income_taxes
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and don't forget to do your taxes April 18th.
00:00:05.360 | If you can't finish them, file an extension. It's something that I've been doing for several years
00:00:09.440 | now. For the longest time, I've been a proponent of paying federal income taxes. Did you know
00:00:14.960 | that most of the federal income taxes are used to pay for Social Security,
00:00:19.200 | Defense, and major health care programs such as Medicaid and Medicare? Those three items account
00:00:25.760 | for about 60% of where federal income taxes go. So someone has to pay these taxes, so it might as
00:00:32.560 | well be us able-bodied Americans. Further, a lot of our elders rely on Social Security to live.
00:00:39.760 | Social Security sometimes accounts for 30 to 50 plus percent of a retiree's income. So if we don't
00:00:47.520 | pay our federal income taxes, it's kind of like disrespecting our elders. The one thing about
00:00:52.480 | paying taxes is that it takes so long to do your taxes. For me, it takes four to six hours on
00:01:00.000 | average. I've got to hunt for all the documents, the K-1s, the investment returns. I've got to
00:01:06.160 | download them. I've got to reconcile them. And then I've got to go review all these documents
00:01:11.840 | multiple times so I don't make an error. Over the years, I've obviously made errors and I've
00:01:15.840 | had to rectify them. I've had to file an amendment and it's such a pain in the butt.
00:01:20.560 | So just imagine if all of us Americans, who are Americans, can file our taxes in 30 minutes or
00:01:26.560 | less. How much more productivity our country would generate if so. Now imagine if you spend many hours
00:01:32.640 | doing your taxes and then you had to pay a tax bill. That's no fun. I've been paying over six
00:01:37.920 | figures in income taxes for years now. And for a while it was okay, but after the pandemic started,
00:01:45.360 | there's just been so much work to do. Exhausted, taking care of kids and writing that I just want
00:01:51.840 | to take things down a notch. And the funny thing is, I kind of feel guilty paying less taxes
00:01:59.440 | because I've been doing it for so long. And so when you change what you've been doing for so long,
00:02:04.080 | it just kind of feels weird. It's kind of like going from working for decades to not working.
00:02:08.480 | It'll feel weird. And the thing is, as someone who came to America in 1991 for high school,
00:02:15.200 | went to college, got a job, and now makes money as a solopreneur, I feel very fortunate. I feel
00:02:21.040 | very fortunate to be able to grow up in this country, work, and make money and take care of
00:02:25.680 | a family. So not paying federal income taxes feels a little bad, right? You want to give back to the
00:02:33.360 | country that gave so much to you. So with my quest to take things down a notch and therefore pay less
00:02:40.000 | federal income taxes, I decided to reach out to several millionaires who feel little to zero guilt
00:02:46.000 | about paying zero federal income taxes. And maybe you're one of these people and I'd love to hear
00:02:51.440 | your perspective in the comments in the post, or shoot me an email or whatnot. Now before I
00:02:57.120 | highlight these profiles, if you're unemployed, underemployed, or struggling to make ends meet
00:03:02.480 | right now, you shouldn't feel bad at all about not paying any federal income taxes. We all go
00:03:08.080 | through ups and downs and the reason why we pay taxes is to help those who are temporarily down
00:03:13.840 | get through difficult situations. So we're brothers and sisters in arms and that's the way it should
00:03:18.320 | be. Please utilize the unemployment benefits, stimulus checks, and government subsidies to the
00:03:23.360 | maximum. For many in 2020 and 2021, there were tough times. In 2022, better times so far. But
00:03:30.880 | who knows, maybe there's going to be a recession in the next 12 to 24 months with the way things
00:03:35.120 | are going. Also, if you're a traditional retiree who's worked 30, 40, 50 years, I don't think you
00:03:41.760 | should feel guilty paying any federal income taxes either. You spent your entire career helping the
00:03:48.800 | federal government, helping our country. So thank you for your hard work. Further, there's a chance
00:03:52.960 | you might not even live long enough to see the benefits of all you've contributed. And I'm
00:03:57.040 | talking specifically about Social Security, which is interesting. If you're single, Social Security,
00:04:02.720 | if you die early, that money goes back to the government. So that's kind of sad and a little
00:04:08.560 | bit unfair. So let's move on. Profile number one, 41 year old with two kids and a 3 million net
00:04:16.320 | worth. He doesn't feel guilty paying any federal income taxes. And here's his story in his words.
00:04:22.000 | I haven't paid federal income taxes for five years since I retired at age 36. I don't feel guilty
00:04:28.320 | because I already paid over 500,000 in federal income taxes when I was working in I.T. Except
00:04:34.640 | for sending my kids to public school, we don't consume much of the government's resources. We
00:04:40.240 | also spend less than $50,000 a year. We pay property tax each year, which partly goes to
00:04:45.440 | fund our public school system, parks, sanitation, roads, fire department and police department.
00:04:51.120 | In addition, we pay sales tax and a small amount in state tax. If the government was efficient,
00:04:58.560 | more efficient and less corrupt, maybe I'd be willing to pay more federal income taxes.
00:05:04.480 | However, when you have Elizabeth Warren claiming she was Native American to get ahead, to get power,
00:05:10.400 | to get money, you've got Donald Trump paying only $750 in taxes the year he got elected
00:05:16.320 | and no taxes for 10 out of 15 years. And then congressional insider trading. Come on now.
00:05:23.600 | Why the hell would I ever feel guilty not paying federal income taxes when many of our leaders are
00:05:29.840 | so corrupt? So does he have a point, listeners? I think he does. We should lead by example. And
00:05:36.240 | if you look back in history, a lot of government officials have shirked on their tax responsibilities.
00:05:43.040 | There was like Timothy Geithner and TurboTax Timmy, remember that time? A lot of issues going
00:05:48.000 | on with politicians. And the reason why is because in order to be a politician, you have to be really
00:05:52.400 | into yourself and really desire power. And that's just human nature. We understand that. And so if
00:05:59.120 | our leaders can't lead by example, why should their followers, we the people, lead by example?
00:06:06.000 | So that's his point. The second profile is a 39 year old woman and a 41 year old man with no kids
00:06:12.800 | and a combined $1.6 million net worth. Here are her words. I haven't paid federal income taxes
00:06:19.280 | in the past two years. In addition, I get a 70% health care subsidy under the Affordable Care Act
00:06:25.440 | because our income is less than 200% of the federal poverty limit. If we had no health care
00:06:30.880 | subsidy, a silver plan would cost over $2,000 a month. I know we're not poor, but I've got a
00:06:36.720 | chronical medical condition that prevents my husband and I from having kids or ever feeling
00:06:41.840 | fully financially secure. One medical mishap could really ruin us. My job was damaging both
00:06:49.840 | physically and mentally. So my husband, who is one year older, left his day job to spend more time
00:06:55.440 | with me. Okay, so she's 39 and he's 40. I don't feel guilty that I don't pay federal income taxes
00:07:01.280 | because I already paid into the system for 17 years. I also have a chronic illness, which I
00:07:06.400 | don't think anybody would wish for in order to avoid paying federal income taxes or get health
00:07:11.520 | care subsidies. Our passive income generates about $35,000 a year. We have deductions and credits
00:07:18.080 | to get our taxable income below $20,550 to pay no federal income taxes. So this is an interesting
00:07:25.680 | point because a lot of government subsidies is based off the percent of federal poverty level
00:07:33.760 | income. So for example, household size of one, you're considered impoverished at the poverty
00:07:40.000 | level if you earn $12,140 or less. Now that is where you get maximum subsidies. And you can get
00:07:47.280 | subsidies up to 400% of federal poverty level. So again, for a household size of one, you can earn
00:07:53.040 | up to about $48,560 to get health care subsidies and other subsidies. And if you're a household
00:07:59.840 | size of four, you're considered in poverty at about $25,000. And you could earn up to $100,000
00:08:07.200 | and change to still get some subsidies. That's 400% of FPL. But after that, you don't get many
00:08:14.640 | subsidies. So I don't know if most Americans understand this. But this is the way the
00:08:18.480 | government is set up to help subsidize those who earn less or who are struggling with based on
00:08:24.800 | their household size. And I kind of empathize with the health care subsidies because my family,
00:08:30.560 | we spend about $2,400 a month on health care premiums, $2,400 a month. And then we've got to
00:08:38.320 | do our co pays and co insurance. So we're protected from disaster case scenarios. But paying $2,400
00:08:46.400 | a month after taxes is a lot. So what we've done is we've structured that as a business expense for
00:08:51.840 | our business, and it's our family plan. So therefore, it should help in terms of lowering
00:08:56.560 | our effective cost. Okay, the final profile number three is a 43 year old man and a 39 year old woman
00:09:03.840 | with two children living abroad and a $2.5 million net worth. Here are his words. We haven't paid
00:09:10.160 | federal income taxes for over seven years because we live abroad based on the foreign earned income
00:09:15.520 | exclusion amount of $108,700 in 2021 and $112,000 in 2022. We didn't have to pay any federal income
00:09:24.640 | taxes. Why should we we were not consuming any American resources. Meanwhile, we actively did
00:09:30.960 | Roth IRA conversions when our income was down and strategically harvested capital losses to offset
00:09:36.640 | any capital gains. As a result, it was very easy to minimize or eliminate our federal income tax
00:09:41.920 | bill. We still had to pay some local taxes to the foreign government, as we should, but they were
00:09:48.160 | minimal. When my wife and I plan to return to America, we will likely not have to pay federal
00:09:53.520 | income taxes either. The 2022 standard deduction amount is $25,900 for a married couple. We'll
00:10:00.560 | probably get a mortgage when we buy a house, which means we'll be able to reduce our income by the
00:10:04.640 | annual interest amount. Further, we get child tax credits for two children under six. We will then
00:10:11.200 | strategically earn most of our income from investment income, which is taxed at a lower
00:10:15.680 | tax rate. Further, we'll work just enough to cover our estimated annual expenses of about $60,000 a
00:10:22.000 | year. With how bloated and inefficient the US government is, paying federal income taxes more
00:10:28.000 | than you should is a waste of money. I don't feel guilty paying zero federal income taxes at all.
00:10:34.080 | So let me ask you folks, how many of you knew about the foreign earned income exclusion amount?
00:10:40.000 | And that was so high at $112,000 for 2022. That's pretty sweet. That's one of the reasons actually
00:10:46.240 | why I would want to work abroad. And I've always wanted to work abroad since I lived abroad for 13
00:10:52.480 | years of my life. My parents were in the foreign service. I lived in Japan, Malaysia, Philippines,
00:10:57.440 | Zambia. And I always thought how cool would it be to live in let's say China, Taiwan, Hong Kong,
00:11:03.840 | Singapore with income. And now that I have income, passive income, and also online income,
00:11:10.480 | I can do it. However, we have two young children who just started school and we don't want to
00:11:17.360 | disrupt their lifestyles. So if you want to travel abroad and work abroad, do so before you have
00:11:23.680 | children or do so after your children maybe are over the age of five so they can remember their
00:11:30.160 | travels. And I think children are pretty flexible and pretty accommodative moving around before
00:11:35.760 | about age 13 or 14. After 13 or 14, let's say high school, they want a steady environment so
00:11:41.760 | they can build those friendships and network and then better plan for their future, college,
00:11:47.680 | trade school or whatever it is. But if you don't want to work and live abroad, here's another
00:11:52.160 | master plan. And that is to work and live abroad for the summer vacations your children have or
00:11:57.440 | the winter vacations. That's what we're planning on doing two to three months during the summer,
00:12:01.840 | visiting a new country, then two to four weeks, maybe going back to Hawaii and spending time with
00:12:07.440 | family during the holidays. Sounds like a good plan. Let's see if we can pull it off. All right,
00:12:11.840 | I purposefully highlighted the perspective of three millionaires because they are all in the
00:12:16.480 | sweet spot for paying minimal to zero federal income taxes. In the past, I've wondered how
00:12:22.720 | millionaires can pay zero federal income taxes. But I realized that so long as your liquid net
00:12:27.360 | worth is under about three to three and a half million, and you're not working a W two day job,
00:12:33.920 | or you aren't earning much from one, it's highly feasible. After your liquid net worth is over 3.5
00:12:40.000 | million, it's much harder to game the system to pay less tax. But of course, you could live,
00:12:44.720 | let's say in a $5 million mega mansion, and have your entire 3.5 million invested in growth stocks
00:12:51.280 | that pay no dividends. So no dividends means no income, you can have that 3.5 million invested in
00:12:58.480 | private companies that take 10 years to see a liquidity event. Again, no income, and therefore
00:13:05.680 | no federal income taxes. So the key to paying less federal income taxes is having not too much
00:13:11.440 | investment income or W two income, and plenty of expenses. If you're a business owner, you also
00:13:17.760 | need the appropriate level of income per household size to receive government benefits and subsidies.
00:13:22.720 | As the federal poverty limit chart shows in this post that I have. So for example, family of four,
00:13:29.280 | you can earn up to about $70,000 a year in income. And it'll give you a great opportunity to pay no
00:13:36.960 | federal income taxes. However, if you're a family of one, you could probably earn about 30, maybe
00:13:44.080 | 35,000 a year and also give you a great chance to pay zero federal income taxes. Remember, there's
00:13:50.000 | the standard deduction for individuals and married couples. And also you can contribute the maximum
00:13:55.600 | 401k amount, which is 20,500 in 2022. And these random tax credits, so these limits and credits,
00:14:03.760 | they tend to go up over time, thanks to indexing to inflation. When you hear the statistic that
00:14:09.440 | 60% of working Americans didn't pay federal income taxes in 2020. And about 57% of working
00:14:16.480 | Americans didn't pay federal income taxes in 2021. It'll probably bum you out if you spend hours
00:14:22.240 | paying your taxes and paying a big amount. But the flip side is that you have enough income to pay
00:14:29.120 | taxes. And these folks probably didn't have that income to pay enough federal income taxes. What I
00:14:34.880 | actually find really interesting about the Urban Brookings Tax Policy Center forecast is that by
00:14:41.360 | the year 2031, it forecasts only 37% of tax units, tax units or households or individuals will pay
00:14:50.160 | federal income taxes. That's a huge improvement from the 60% we saw in 2020. And if so, this is
00:14:57.360 | a bullish data point for the future of our economy, because it means more Americans are making more
00:15:02.720 | money, being more productive, there's going to be more revenue to fund social safety nets and
00:15:08.400 | resources. So one of the fears is, you know, more and more people don't pay any taxes, and they rely
00:15:14.800 | on fewer and fewer people to fund them. And so that, you know, leads to socialism, lack of
00:15:19.600 | innovation, productivity, and so forth. But the Tax Policy Center believes it's going to go the
00:15:24.080 | other way, with, let's say, 63% of Americans paying federal income taxes. So if that happens,
00:15:32.000 | that's pretty good. I'm kind of skeptical it will happen, but let's just see. So let me ask you,
00:15:37.920 | do you feel less guilty paying less taxes in the future, after listening to this podcast or reading
00:15:44.000 | my post? For me, I do feel a little less guilty if I start paying less federal income taxes,
00:15:49.920 | because, well, if you work less, and you make less, then of course, you should pay less in
00:15:54.960 | federal income taxes. However, I don't think I'll fully be able to overcome the guilt of paying
00:16:00.320 | zero federal income taxes as an able-bodied American. You know, I'm 45 years old, so that's
00:16:06.640 | middle age. I still have a lot to give, and I feel really good about paying a certain amount in
00:16:13.120 | federal income taxes, because there are people in need in this country. It's the same thing with
00:16:17.440 | donating money to charity. You feel good helping other people, and so you feel good having skin in
00:16:22.320 | the game and contributing to your country. So if you can't contribute by paying federal income
00:16:28.400 | taxes for whatever reason, then the simple solution is to just contribute more of your
00:16:33.040 | time to help other people. And I think as long as we can contribute our time or our money,
00:16:38.560 | our thoughts online to help other people, I think that's a great thing, and I look forward
00:16:42.800 | to hearing from your responses. Thanks so much, everyone. I'm going to spend the next four to six
00:16:47.280 | hours doing my taxes. I've really waited to the last minute, and if you enjoyed this podcast,
00:16:52.160 | I'd love to hear from you, and I'd love a five-star review. Thanks so much.