♪ California's top casino and entertainment destination is now your California to Vegas connection. Play at Yamaha Resort and Casino at San Manuel to earn points, rewards, and complimentary experiences for the iconic Palms Casino Resort in Las Vegas. ♪ Two destinations, one loyalty card. Visit yamaha.com/palms to discover more. Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

My name is Joshua, I am your host, and today on Radical Personal Finance, I want to share with you how you can live income tax-free in these United States. Now, a couple of caveats as we begin. I'm going to be talking in today's show about the United States, how you can live in the United States and live income tax-free.

Obviously, there are many ways to live income tax-free in many places around the world. You could move to the Cayman Islands and make millions of dollars as a banker, as a finance guy, or as an online business guy, and pay $0 of income tax, as long as you're not a US American citizen.

You could, of course, do all kinds of things in other countries. Every country, if you go through and study their tax code, usually winds up with some strange little loophole, some strange little thing that makes that country attractive. In Canada, you can actually earn a significant amount of money in the form of dividends from Canadian corporations and pay $0 of income taxes on that.

In the United Kingdom, you can generate your income as a professional gambler and not pay any income on that. So if you're a professional poker player, it behooves you to be living in the United Kingdom, rather than, as long as you're not a US citizen, of course, the caveat we always have to give, rather than in other places.

Today, I'm going to talk about the United States, and I'm gonna tell you how you can live income tax-free in the United States. Some of this will apply to other countries, because many countries have some form of this particular planning idea that I'm gonna focus on, but it definitely works in the United States, so you'll wanna consider that.

There are a number of obvious, but low-hanging tax savings ideas that I'm not gonna cover today. For example, in the previous episode in this podcast, I talked about how if you simply work under the table and you don't report your income, yes, you can pay no taxes, but I don't recommend it.

And I explained that, number one, I don't recommend it because it winds up causing you a significant, potentially, amount of legal risk, but perhaps more importantly, it just keeps you at the lower echelons of society. You're never gonna build a big business that you're proud of, that you can put your name on, that you can really build something if you're worried about the taxman.

Yeah, you'll do some little fly-by-night business, working out of the back of your truck, and you might make tens of thousands of dollars a year. Conceivably, could you make six figures? I think absolutely you could, but you're gonna be worried about spending it, right? You're not gonna put pictures of your nice vacations on Facebook because you're worried about the taxman using that as evidence against you of how much money you're spending.

It's just, it's no way to live, in my opinion. But what if you genuinely want to build something big, live in the United States, and live completely income tax-free? Well, if we go to those basic requirements, we have a very, very small number of planning ideas that we can choose from.

And there is basically one big planning idea that works, but that also has a huge problem. But here's the big planning idea. It's called debt. Here's the key thing about the US Income Tax Code. When you borrow money, that is not income. And so if you borrow money, and then spend that borrowed money, you can spend money without generating taxable income.

You say, "Okay, Joshua, that's obvious, but what's the planning idea?" Well, I think there are more planning ideas here than people often recognize. You know, years ago, I remember I didn't have very much money and I was investing heavily in my business. I was using credit cards, borrowing money for personal expenses and business expenses, putting them on credit cards.

And I wound up at the end of the year with a big fat tax refund, no tax bill, big fat tax refund, because I hadn't made any money. I had just borrowed money. And yet I had gotten my way through the whole year and I had lived. I had spent money, I had paid my bills, and I hadn't paid any income taxes because I hadn't created or received any income.

I had simply borrowed money. So this is the key, and we're gonna explore some aspects of this. Now, credit cards have a rather limited shelf span, shelf life. All right, you can borrow money on credit cards for actually a significant amount of time. As you know, I sell a course on it, available at radicalpersonalfinance.com/store, how to borrow money safely and never pay interest using credit cards.

And basically in that course, among other important topics, I teach you how to play the 0% credit card game. In a country like the United States of America, where credit flows easily, almost anybody can get their hands on credit cards. You can get good credit offers and you can borrow vast sums of money and you can regularly roll those sums of money over and providing yourself with spendable money, right?

Most places they'll take a swipe, a credit card that you can swipe, but you haven't created income. But usually in almost any circumstance that I can think of, you do reach an end to your ability to borrow. You can't just roll over credit cards indefinitely and not have any income.

After all, when you sign up for a new credit card, you have to declare your income. And you can only kind of play the game of, well, I just had a job making $200,000, so I'll declare that. You can only play that game for a little while before at some point in time, the credit card company comes along and says, yeah, you're not such a great risk.

Now, clearly, if you've got some way to pay off those credit cards, that doesn't depend on you. For example, you might receive annual gifts from a family member. Well, of course, annual gifts, as long as they fall below the annual exclusion amount, those are always tax-free. And then if they are actually taxable at some point in time, income that's received as a gift is not taxable to you.

So if you have a wealthy parents and your wealthy parents want to gift you with a certain amount of money every year, they can gift you 30, 40, hundreds of thousands of dollars per year, and that won't be taxable income to you. So that's one idea that can sometimes come into play.

You might have a spouse, right? A husband or a wife who is generating a lot of money. Well, income that your husband or your wife receives is not yours, and there's no gift tax on money that's transferred among spouses. So maybe you spend hundreds of thousands of dollars a year, you swipe your credit cards, but your husband or your wife gives you money and you just use that money to pay off your credit card bill.

So obviously that would work, but of course it's kind of cheating, right? It's not really delivering the good. So how do you genuinely live income tax-free? Well, the answer is you need something that's growing, that's going to allow you to pay off your debt before you start falling behind on payments.

And it's ideal if that thing is not taxable, right? So how do most people use credit cards? Well, most people would swipe a credit card, they would go out and they would buy a bunch of stuff, and then they would plan that in the future they're going to make more money.

So in my case, when I was borrowing money to start a business, yeah, I wasn't making any money, but I was planning to make money. And then in the future, when I made money and then I paid off those credit cards, I couldn't deduct those credit card expenses because the business once had already been deducted.

But later I had the opportunity to pay a higher amount of income tax on my income to pay off those credit cards. And so that plan ultimately breaks down. But what if you could have something that could grow and could allow you to continue borrowing on it almost indefinitely?

Wouldn't that be cool? Wouldn't that solve the problem? The answer is yes, but it's really hard to find. Now let's talk about this for a moment. Let's use perhaps the most popular tool for this, although perhaps not the only one, but the most popular tool for this, which is something like real estate.

Let's assume this. You go out today and you buy a house that's marketed under value. I'm gonna play fast and loose with my numbers to get the point across to you. You buy a house, this house, you pay $100,000 for this house. Right, you had to have the $100,000 in some form.

Maybe you can borrow it, but maybe you just start with $100,000 that you've already paid tax on. So you buy a house for $100,000. But because of your skill in negotiating a superior deal, your house is actually worth $150,000. So you buy it at $100,000, and on day one, you have $50,000 of gain in the property.

Well, then you go out and you get a mortgage on the property. In our case, for simple math, let's assume that you mortgage $150,000 on the property, and you take and set aside the $150,000 in your bank account. Well, what you've just done in our silly little example is you have just created for yourself $150,000 of spending power that you don't owe any kind of income tax on.

You don't owe any kind of employment taxes, no Medicare, no Social Security. You also don't owe any kind of income taxes, no federal income taxes, no state income taxes. Why? Because you borrowed money. But what does a house often do for you? A house often generates for you a certain amount of rental income.

And so you can take that rental income and you can pay down the mortgage, or at least make the mortgage payments. Now you say, "Whoa, whoa, whoa, whoa, wait, Joshua. Is that rental income not taxable income?" Answer is absolutely yes, it is. It is taxable income. But there are some assets for which taxable income is sheltered in some way.

In real estate, it's called depreciation, right? The idea is that your house becomes, the structures of your house become worth less and less each year as they're used up. And so you get a certain amount of depreciation allowance where you can offset the income with those expenses. Now, this can be something of a very interesting financial engineering game in some circumstances.

Because the reality is the land under your house, while your house itself is steadily being used up and is running out of value, thus your depreciation expense, the land underneath your actual house might be increasing in value. And it might be becoming more desirable. And thus people might want your house, even though it's more used up than it was previously, they might want your house more than they did before.

And so your actual property is increasing in value. Please note, it's not because the house is increasing in value. The house is not decreasing in value. The house is being worn out, it's being used up. That's why you have a depreciation expense. But what is happening is the attractiveness of your house is increasing in value.

And the land underneath your house is increasing in value. And so someone might be willing to pay you more for it at some point in the future. And so you can often shelter your income payments from tax by your depreciation expenses. This really works best if you don't have a lot of other expenses associated with the house.

So in a perfect world here, if we were just designing our perfect how to live income tax-free world, we would have a house and we would never pay any principal on the mortgage. We would just pay interest payments. That way the interest expense is a pure cost. We don't need to generate additional income in order to pay down the mortgage 'cause we don't wanna pay down the mortgage in this current example.

We just wanna keep the mortgage there and borrow the money and just pay the bare minimum. And so thus we don't realize very much income to pay down the mortgage. And then it's best if all the other expenses are controlled as well. Now let's say that you buy the right kind of house in the right kind of neighborhood and then you own it for a few years, three years say, and then you sell it.

And maybe now it's increased in value in the marketplace because people wanna move where you bought or they like the land underneath the house and they say the house will work for now. And now somebody comes along and offers to pay you $250,000 for the house. Well, in the US tax code, there's something called a like-kind exchange where you can exchange certain capital gain property for other capital gain property without recognizing the embedded taxable gain in the property.

So you can swap out one rental house for another rental house. And so you go and you do this called a 1031 exchange. You do this exchange from one rental house to another rental house. And now you have another rental house, but now you go and you take the, what number did I use?

I guess $250,000, I guess was the number I said. Somebody gave you $250,000 for the property. So you take your $250,000, you go out in the marketplace and you find a house that's actually worth $350,000, but you get a good deal on it and you pay $250,000 for it.

So now you repeat the process. You take out, you buy the house with the money that you have. You do a like-kind exchange into the property so you don't recognize any taxable gain. Then you mortgage that property. You go ahead and put a $300,000 mortgage on it. Now all of a sudden you've got another, what do we have, two hundred and something thousand dollars of money in your pocket.

And you repeat this process again and again and again. You buy a property, you buy capital gains property, you allow that property to appreciate, you borrow against that property and you spend the borrowed money while allowing the income from the property to pay your necessary payments to your lender.

This is how you generate tax-free income. It's not actually income, 'cause it's not income, it's debt. But this is how you have spendable money on your bank account that's genuinely income tax-free. Now you'll quickly see the restrictions and you'll quickly see the disadvantages of this. So one obvious thing is you need capital gains asset.

You need something that's not creating income necessarily, you just need a capital gains asset that's growing in value. You also need something that's growing in value. If you go and you buy a house and you mortgage $300,000 on it, and all of a sudden now you can't sell it for more than $200,000, you got a major problem.

Because the lender comes knocking and says, "Hey, we want some money." And you've got to go and generate that money in some other way, and that other way might not be as tax efficient as you had hoped. But this is the basic process of living income tax-free in the United States.

The secret is borrow money. Borrowed money is not income. And if you can supplement that borrowed money, if you can buttress or backstop that borrowed money with a high quality asset that's growing in value and not sell the asset, in theory, you can actually live this way for your entire lifetime.

So let's say you had that real estate investor who purchased those houses, it was constantly taking out new mortgages, was spending the money from the mortgages, that investor would have a very low taxable income. Now, in reality, no investors don't keep it at zero, but they can often keep it at a very low amount of actual taxable income because of this process.

Well, if you continue to own those properties at the end of your life, remember that we're dealing with capital gains property, and so you could even leave that property to your heirs. And then under current US estate tax law, any capital gain property that you own at the date of your death receives what's called a step up in tax basis.

So if you own the property, and let's say your whole portfolio, your basis in the property is a million dollars, but it's worth $5 million, and you've been spending the equity in the form of debt, but allowing your tenants to pay that off for you, and your depreciation expense is sufficient so that you don't have a lot of taxable income.

Well, now at your death, you own $5 million of real estate, you can leave that $5 million to your heirs, your heirs would inherit the money, with no income taxes due, because there's no income taxes due on inherited property. They would, in our example, not owe estate taxes under current law.

And what's more important is the entire capital gains that you had embedded in the property would have been cleared out by the step up in tax basis at your date of death. And so now your heirs can genuinely live tax free, right? They could take the $5 million, they can go and sell it, they can sell it all at once, they can sell it piecemeal, and they can spend all that money completely income tax free, or they can repeat the process, right?

They can keep your $5 million portfolio, they can borrow against it, maybe they go out and they mortgage it for $3 million, the property continues to appreciate in value, they spend the mortgaged money for their living expenses, and then they can repeat that year after year after year, or decade after decade after decade.

Now, is this an unwieldy plan? It is, it really is. Is it hard to do this purely? I've never known anyone who was able their entire lifetime to live completely income tax free in the United States. But this is a valuable component that can fit into what you're doing.

And you can actually repeat this process a number of times. Now, real estate's not the only thing that this works with, but it does work very nicely with real estate, why? Well, there are a couple of other things that can come into play. So with real estate, you can often force the appreciation with your own labor.

So years, about three or four years ago, I did a series of shows on real estate and how to get wealthy and pay no tax with real estate. And in that, I gave the example. Let's say that you're skilled, right? You're a good carpenter, you enjoy working with your hands, you're good at fixing up houses.

So you go and you buy a handyman special house, and you just simply buy it. You spend your time forcing the appreciation by painting it, fixing the walls, fixing the house up, right? You're now forcing appreciation of the property. It's becoming more valuable, not because it's just magically becoming more valuable.

No, it's becoming more valuable because of the work that you put into it. But because you're just investing your own time, your own labor, your own work, and some of your own money, you're not generating taxable income. Well, now you can go ahead and if you live in the property, you can file that property as a personal residence.

And that personal residence is now eligible for the exclusion on capital gains from the sale of a personal residence. Up to $250,000 of capital gain for an individual, $500,000 for a married couple filing jointly. With a few exceptions, basically you got to live there at least two of the last five years.

And there's no reason why you can't repeat this process. So a real estate investor, especially one who's willing to put work into the property, can do this again and again and again. They can buy a house, they can fix it up, they can rent it out, then they can go on and repeat.

And anytime they want to go ahead and get some of that tax-free gain, they kick out their renters, they move in themselves, then they live in it for two years, then they sell the property, and now all of a sudden there's genuine tax-free gain to them. And so they can do this back and forth.

Now, I don't know that many really successful real estate investors who are willing to move that much. I've never known anybody that was that committed to tax savings where they were willing to deal with the lifestyle costs. Most of us at some point in time realize that tax savings are not the be-all, end-all, that actually you just want to live a nice lifestyle.

And if you can save some tax, great. Otherwise you'll pay the amount of tax that's necessary for your lifestyle. But it is possible. What other assets could do this? Well, other assets might include something like a family business, right? So if you had a family business that you had shares of stock that you could borrow against, now you could possibly just simply borrow against those assets, pledge the stock as collateral, and then spend the debt.

Doesn't have to be a family business though. You can do this with publicly traded companies as well. In fact, in many cases, it's easier to do with publicly traded accounts because margin financing is more easily available than on something like a closely held corporation. If you've got a big, giant stock portfolio and all of a sudden you need a bunch of money, income tax-free, well, you can just simply borrow the money by pledging some of the stock portfolio as collateral.

This is not without risk. What if your stocks go down in value and all of a sudden you wind up facing margin calls? Not without risk. But it without question works and it allows you to spend money without selling assets. So if you have a portfolio of just amazingly performing stocks that are growing in value all over the place, you can simply keep it and borrow against it.

You could do this with other assets. You could do this with cryptocurrencies. If you have a big portfolio of Bitcoin and you find somebody who's willing to lend you money using the Bitcoin as collateral, then you will be able to spend that loaned money and not pay any income tax on the loan.

The downside with some of these assets has to do more with, well, how do I actually service the debt? Where do I get the money from to service the debt? See, real estate, because it has often income and because it has depreciation expense that can offset some of that income, real estate works well.

And it's hard to find another asset that has that same profile, where you have income that you can spend right now, but that income is sheltered by a depreciation expense, a depletion expense, if you're doing this with an oil and gas well or something like that. And it's enough to allow, to give you time for the asset to grow.

But this is the basic concept. To repeat, I've never known anybody who's lived their whole life totally tax-free in the United States. But if you genuinely want to live really well, and you genuinely want to spend as much money as you can, and you don't wanna pay a lot of tax, this is how you do it.

While I don't think it's practical to live totally tax-free, I do think that you can use this idea to be intelligent about your personal tax planning. It's very important for investors to develop these capital gains assets while they have other income, and then to use these sources of financing when they're recognizing other income.

Example, you're looking at a real estate portfolio and you're doing financial planning for yourself or for a client if you're a financial advisor. And you recognize, look, we got $3 million of paid off real estate over here. And then over here, we've got some assets where the tax has been deferred.

Well, if we could go ahead, and the client wants to spend more money, if we can borrow money on the real estate portfolio over here, and then we can have that income, now we don't have as high of an income. So when we're taking distributions from a 401k, we're taxed at a lower rate.

So that can be an appropriate application. You can use the credit card technique to shelter some of your income and allow you to provide some opportunities. So for example, if I were working with somebody who was just totally flexible, and we're making up these clients, they're not real life, but just someone who's totally flexible.

Just pretend that you could spend an entire year living on your credit cards. This is very easily done. If you've got a good credit score, you've got a good credit history. You can spend an entire year living on your credit cards. Maybe you have a paid off house. Maybe you're living in Airbnb's, traveling around the world, but you're just swiping your credit card for everything.

It's not that difficult to do that entirely interest free and expense free by using a series of 0% introductory rate credit cards where you get 12 months or 18 months of financing. So during that period of time, you don't need to create any taxable income. You just simply borrow money for a year, borrow money for 18 months.

Now, because you've borrowed money, your overall income declines massively. So now is a good time where you can do Roth conversions, and you can convert some of your 401k dollars to Roth dollars. You can go ahead and sell capital gains assets. And when your earned income is very low, you may be able to sell tens of thousands of dollars of assets at a 0% tax rate.

And so for somebody who's very flexible, this can work really well. Then the next year you go ahead, you generate enough income from your, you will go ahead and recognize, excuse me, recognize enough income from some of your other investment assets. You can pay off the credit cards. That's gonna be a high income year, but that's a year that you don't do Roth conversions.

That's a year that you don't sell any other capital gains assets that are necessary, that aren't necessary. But that year you go ahead and create income. Then the following year you repeat. This can also work as a form of bridge financing. You use an asset and you combine all of the above.

Somebody has a property, you go ahead and put a big mortgage on that property so that they can have income now. This allows you to retire early because you're spending that income. You can wait now until 59 and a half, so there's no early retirement distributions. And then during those years, you go ahead and do a bunch of conversions.

You max out your conversions from a traditional IRA or a traditional 401k into a Roth IRA. You max those conversions out and then you'll be able to take that money tax-free again, or you sell capital gains assets. So the most important thing is for you to always look at the concept and remember, hey, I could borrow money.

And if I borrowed money, that's not income. And so now I have a tool at my disposal. You can do this with life insurance. You could take life insurance loans against cash value. What's more interesting is if you are in a situation where you're planning with somebody who's terminally ill, right, you use life insurance, you take some sort of a viatical settlement.

You take loans against the life insurance using the life insurance as collateral, maybe with friends or with, you could do it with a company as well. Just always remember in the back of your head, if you need spendable money and you don't wanna pay tax, the answer is to borrow it.

Borrowed money is not income. One would hope I wouldn't have to do any, many disclaimers here. I would just simply point out, you always have to when dealing with debt. We're not dealing here when we're talking about these ideas. We're not dealing in a world where, somebody is going out and just frivolously is buying stuff on credit cards that they can't afford to pay back.

That's dangerous. And it's not tax-free either. If you have debt that's discharged in a debt settlement of some kind, you'll receive a 1099 for the amount of the debt that's discharged. So don't think, oh, I'm gonna go out and I'm gonna borrow $100,000 on credit cards. Then I'm gonna just stop paying and then I'll pay it back later at $15,000 because that debt, you'll be taxed on it due to the forgiveness of debts.

So they're onto that one. But if you can find the right set of assets or the right time, the right situation, you can genuinely put these strategies together and it can be useful for you in a tax planning context. There are some other minor strategies that we can talk about, but here's what you need to know about US income taxes.

Pretty much all the good loopholes have been closed. You know, years ago, if you watch online arguments about taxation, generally what people will do is they'll put up the marginal tax brackets of years past. Marginal tax brackets in the United States have reached as high as, oh, is it 90 something percent?

Just insane numbers. And so they'll say, well, look, we had 80% taxation before and we did fine and we can do that again. But what's often unrecognized is how many loopholes have been closed since then of deductions, of exempt income, of all kinds of different things. And so in today's world, I've looked for years.

I've looked for years. And you can find all these little ideas, but basically it's mostly just piecemeal stuff. Other than what I've just described, there's no big idea that allows you to have millions of dollars. And you can see the limited applicability of the ideas that I've just outlined.

You can see that if I wanted to actually spend a lot of money, I would need so much money. And how did I create the money in the first place? How did I actually do it in the first place? You have to be a very skillful person. And so there's virtually no way living in the United States to actually live income tax-free.

There are ways to manage it. It's not the worst place in the world, but there's no way to genuinely live income tax-free. And so that's why I so often talk about going somewhere else because you can genuinely live income tax-free in many parts of the world, and you're welcomed with open arms.

But if you wanna live income tax-free in the United States, always remember, borrowed money is not income. That's all for today's show. I remind you that until March 31, you could save 50%. In this case, I don't 1099 you for the savings. That's one good thing. A borrowing, sorry, buying things on sale, you don't, you need less income.

So you have to recognize less income, but you don't get charged tax on money that you save on sales, or at least not yet. But you can save 50% through March 31st on all of my courses that are available at radicalpersonalfinance.com/store. That sale ends on March 31, but more importantly, those courses disappear on March 31.

In order to save, go to use coupon code changing platforms. I'm removing those courses from the marketplace. Gonna be adjusting them, reshooting them, coming out with some more ones and some new ones in the future. And so they are really good. All the information is still current. I'm still active there.

We're doing a series of Q&A calls. And I would encourage you highly, if you've thought, if you heard me talk about some of these ideas, go to radicalpersonalfinance.com/store. I'd say probably the biggest deal there is probably that credit card course, because I never charged what I should have for that course.

And now it's 50% off. When it comes back out, it's probably gonna be tripled or quadrupled in price because I'm gonna add a whole bunch to it. But that credit card course is phenomenal. And I've had several people that have used it to do what we're talking about today, to use now credit cards as a form of bridge financing so they could retire early, not incur early retirement distribution penalties, et cetera.

And so I'd highly recommend that to you. You can find that at radicalpersonalfinance.com/store. And I will be back with you very soon. - The holidays start here at Ralph's with a variety of options to celebrate traditions, old and new. Whether you're making a traditional roasted turkey or spicy turkey tacos, your go-to shrimp cocktail, or your first Cajun risotto, Ralph's has all the freshest ingredients to embrace your traditions.

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