How to Pay No Federal Income Tax

Wednesday February 27, 2013 4:21 PM - 2 Comments

taxesDuring the recent presidential election, tax reform was a hot-button issue. Billionaire investor Warren Buffett and Republican presidential candidate Mitt Romney both ignited fiery debates — Buffett when he claimed the richest 1 percent of the population is not paying its fair share of taxes and Romney when he said nearly half of Americans pay no federal income tax.

According to the Tax Policy Center, 46.4 percent of Americans paid no federal income tax in 2011, a percentage that may sound alarming. But other taxes, such as those levied on property, cigarettes, gas, liquor, payroll, Social Security, and state and local taxes, ensure that virtually no one gets off scot-free.

Even so, the significant number of Americans who pay no federal income tax raises the question: How can a taxpayer reduce federal income tax liability down to nothing?

“It depends on the type of income as well as the deductions and credits you can apply,” says Bob D. Scharin, senior tax analyst for the tax and accounting business Thomson Reuters.

Nontaxable income
“Not all income is taxable,” Scharin says. Here are a few examples.

Deductions and credits
In addition to the types of income a person receives, the use of deductions and credits can reduce or eliminate federal income taxes.

Of course, the possibility of reducing taxes to zero has always been a concern for revenue raisers. That’s why the alternative minimum tax, or AMT, was enacted in 1969 as a way to ensure that in most cases at least some tax is paid. A portion of income is excluded before the AMT kicks in, and the American Taxpayer Relief Act enacted this year now indexes those amounts to inflation to protect lower- and middle-income workers from this parallel tax.

Tax reform and fairness will likely always be a debatable issue because of the nature of our progressive system, in which the amount of tax owed increases according to the taxable amount, says Knoll.

In general, Scharin says, those who are making the most drastic reductions to their federal income tax liability are taking advantage of deductions and a variety of credits aimed primarily at the elderly and the poor. At the other end of the spectrum, the wealthy are giving away assets, thereby reducing their wealth.

“Nothing is simple in the tax code,” says Scharin. “Often in the name of fairness, the tax code gets more complex.”


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2 Responses to “How to Pay No Federal Income Tax”

1. Comment from Oldtimer
Time February 27, 2013 at 7:22 PM

The bottom line is, get a knowledgeable tax accountant. This stuff is too complex for the average Yossi to get right. And if you don’t get it right you could get a nasty surprise when you get your tax bill. Better safe than sorry.

2. Comment from Sol
Time February 28, 2013 at 9:12 AM

My accountant said the easiest way to pay no tax is to not make money

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