I’ve been a long-time advocate of paying federal income taxes. Federal income taxes are used to pay for Social Security (~23% of the budget), defense and security (~16% of the budget), major health programs such as Medicaid and Medicare (~25% of the budget), and other social safety nets. Someone has to pay income tax, so it might as well be us!
However, if I have to pay my taxes, I’m bummed that it’s taking so long. On average, I spend about four to six hours doing my taxes because I have several assets to report. It is important that I check and recheck all my submissions before archiving them to avoid as many errors as possible.
If only we could spend 30 minutes or less doing our taxes. Just think how much more productive our country would be! After six hours, it’s not the nicest feeling to pay a six-figure tax bill.
Since everything is rational, I have a desire to kick it up a notch by the end of the year. I would rather make less money to have more freedom. Tax rates are going up and social safety nets are getting bigger.
However, there’s still a weird part of me that feels guilty about paying less federal income taxes! It’s almost like I have Stockholm Syndrome in government. So I decided to interview some multimillionaires who feel little to no guilt about paying federal income taxes. Maybe you are one of them and you can also share your perspective.
How You Can’t Feel Guilty For Not Paying Federal Income Tax
First, if you’re unemployed, unemployed, or struggling to make ends meet, you shouldn’t feel bad about not paying federal income taxes. We all go through our ups and downs. The reason we pay taxes is to HELP those who are temporarily down to get through difficult situations.
Therefore, make maximum use of unemployment benefits, incentive checks and government subsidies. For many, 2020 and 2021 were extremely difficult times.
If you are a traditional retiree who has worked for over 40 years, I don’t think you should feel guilty about not paying federal income taxes. Paying federal income tax for decades is great! And chances are you don’t live long enough to see the benefits of everything you’ve contributed.
What I’m most interested in is how relatively young multimillionaires feel okay if they don’t pay federal income taxes. It’s like learning how some FIRE proponents are OK with receiving health care grants, even though they’re clearly not the intended recipients.
Profile #1: 41-year-old with two children and a net worth of $3 million
I haven’t paid federal income tax in five years since I retired at age 36. I don’t feel guilty because I already paid more than $500,000 in federal income tax while working in IT.
Other than sending my kids to a public school, we don’t consume much of the government’s resources. We also spend less than $50,000 a year.
We pay property taxes every year that go in part to our public school system, parks, sanitation, roads, fire and police. In addition, we pay sales tax and a small amount of state tax.
If the government were more efficient and less corrupt, I might be willing to pay more federal income taxes. However, if you have Elizabeth Warren claiming she was a Native American to get ahead, Donald Trump paid only $750 in taxes the year he was elected and no taxes for 10 of the 15 years, and insider trading of the Congress, come on now! Why the hell would I feel guilty if I don’t pay federal income tax when many of our leaders are corrupt?!
Profile #2: 39-year-old with no children and a net worth of $1.6 million
I have not paid any federal income tax in the past two years. In addition, I get 70% health care subsidy under the Affordable Care Act because our income is less than 200% of the federal poverty line. If we didn’t have a health insurance subsidy, a silver plan would cost over $2,000 a month.
I know we are not poor, but I have a chronic medical condition that prevents my husband and I from having children or ever feeling completely financially secure. My job was detrimental to my health, so my husband, who is also my age, left his day job to spend more time with me.
I don’t feel guilty for not paying federal income tax because I’ve been paying to the system for 17 years. I also have a chronic illness that I don’t think anyone would wish to avoid in order to avoid federal income taxes.
Our passive income generates about $35,000 a year, but we have deductions and credits to get our taxable income below $20,550 to not pay federal income tax.
Profile #3: 43-year-old and 39-year-old with two children living abroad and a net worth of $2.5 million
We haven’t paid federal income tax in over seven years because we lived abroad. Based on the foreign income exclusion amount of $108,700 in 2021 ($112,000 for 2022), we didn’t have to pay federal income tax. Why should we? We were abroad and did not consume US resources.
Meanwhile, we have been actively making Roth IRA conversions as our income declined and strategically harvesting capital losses to offset any capital gains. As a result, it was very easy to minimize or eliminate our federal income taxes. We still had to pay some local taxes to the foreign government, as we should, but they were minimal.
If my wife and I plan to return to America, we probably won’t have to pay federal income tax either. The standard deduction for 2022 is $25,900. We probably get a mortgage when we buy a house, which means we can reduce our income by the annual interest amount. We also receive a child discount for two children under the age of six.
Strategically, we will derive the majority of our income from investment income, which will be taxed at a lower rate. Furthermore, we work just enough to cover our estimated annual cost of living of approximately $60,000 per year.
With how bloated and inefficient the US government is, paying federal income taxes is a waste of money. I don’t feel guilty for not paying federal income tax at all.
The Net Worth Sweet Place For Not Paying Federal Income Taxes
I purposely emphasized the perspective of three millionaires because they are in a good position to pay minimal federal income taxes. I have long wondered how millionaires can pay zero federal income tax. But I realized that as long as your liquid assets are less than about $3.5 million and you don’t have a W2 job, it’s doable.
After your liquid assets are over $3.5 million, it is much harder to play the system to pay less tax. But, of course, you can live in a $5 million mansion and invest your entire $3.5 million in growth stocks that don’t pay dividends. Then you can easily not pay tax if you do not have W2 income.
The key to paying less federal income taxes is that as an entrepreneur, you don’t have too much investment income and a lot of expenses. You also need the right income level by family size, as the Federal Poverty Limit chart above shows.
For a family of four, earning up to ~$70,000 a year in income gives them a great opportunity to avoid paying federal income taxes, especially if the bulk of the income is investment income. However, if you’re just a family of one, earning up to about $30,000 a year also gives you a good chance of not paying federal income taxes.
Remember, the standard deduction limit for a single person is $12,950 and $25,900 for a married couple. The current maximum contribution of 401(k) is $20,500 and then there are arbitrary tax credits. Such limits go up every year.
Percentage of Americans who do not pay income tax
Below is a chart from the Urban-Brookings Tax Policy Center that predicts that approximately 101.7 million of the 178.1 million tax units (households or individuals) will not pay taxes in 2021. That’s 57.1%, an improvement from 60.6% of tax units that did. t pay tax in 2020.
Interestingly, the Tax Policy Center predicts that only 37% of tax entities will not pay federal income taxes by 2031. I think that prediction is very optimistic because once you get something for free, your expectations are set. But if the Tax Policy Center is right, then this is a bullish data point for our future economy.
Do you feel less guilty by paying less taxes now?
After doing this exercise, I’ll feel a little less guilty about paying less federal income tax. If I work less and earn less, of course I have to pay less income tax. After all, most working Americans don’t pay federal income tax.
However, I’m not sure I’ll be able to fully overcome the debt of paying zero federal income taxes as an able-bodied American. This country has given me so much since I ended up in the suburbs of Washington DC in 1991. I feel very fortunate to have had so many great opportunities to earn as an employee and now as a solopreneur.
Furthermore, it is nice for a family of four to earn more than the $70,000 per year threshold of not paying federal income taxes. My kids are young and we want to spend more money on education, food, housing and travel especially if I go into decumulation mode soon. Perhaps, after our kids leave the nest, we’ll downsize to a smaller home and strategically cut our income to lower our tax liability.
Finally, I still think everyone should pay some federal income taxes, even if it’s only five dollars a year. Just like donating to a good cause, it feels good to contribute financially to help our country. It feels great to have skin in the game. And if we can’t contribute financially, hopefully we can contribute with our time.
Readers, Would You Feel Guilty If You Didn’t Pay Federal Income Tax? If you don’t pay federal income taxes, how did you overcome the debt, if any? I’ll be happy to add your perspective to the post.
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