The Goal is to Pay No Income Taxes, Legally

Taxes. They come in many forms. Some are hidden: corporate taxes are built into the cost of goods and services you buy; excise taxes are included into products like gasoline. 

Others are more visible like sales and property taxes. And then we come to the most visible and dreaded tax of all: income tax. When people complain about taxes they are usually talking about income taxes.

Avoiding income taxes should be easy considering the size of the tax code and the millions of loopholes available. And that is the problem. The tax code is so big that it is daunting so most people have their eyes roll back in their head when they should be facing the tax code head on.

We will discuss several avenues to a zero out your income tax, but first some ground rules.

  1. Keeping your income low is not eliminating taxes; it is eliminating income at a 100% tax rate. Our discussion will focus on ways to eliminate income taxes at any income level, with only a slight nod to lower incomes where incomes taxes rarely apply.
  2. Tax credits can cut your taxes significantly. I’ll point out a few of these obvious gems, but will not hang my hat on mainstream tax credits to eliminate your income tax.
  3. No using cheap gimmicks like “have three kids” to eliminate your income taxes. I will assume no children in most of my strategies here.
  4. Debt is not tax-free income. Borrowing more money is NOT a tax strategy! No universal life craziness on this blog, either.
  5. Our inquiry will focus on tax strategies available to a large number of people and legal ways of converting taxable income into tax-free income.

Before we begin our analysis I want to point you to an excellent article on this topic published by the Root of Good blog in 2013. The Tax Cuts and Jobs Act of 2017 (TCJA) changed many of the rules the Root of Good blog post used. Still, it is a good place to get ideas for the flavor of strategies available.

I also discussed 10 Ways to Legally Stop Paying Taxes in a prior post on this blog. You may wish to review that post as well if you are serious about reducing or eliminating your income tax.


Income Tax on Income Under $100,000

A short nod to readers with a five-figure income. 

There are so many tools for eliminating incomes taxes on incomes under $100,000 that I will only scratch a few. 

  1. Social Security benefits can be partially or totally tax-free. This link provides more details.
  2. The TCJA eliminated exemptions, but jacked the standard deduction. In 2017 the standard deduction on a joint return was $12,700. In 2021 the standard deduction is $25,100 on a MFJ return; $12,550 for MFS and single taxpayers; and $18,800 for heads of household. This means a married couple filing a joint return gets a $25,100 deduction right out of the gate. 
  3. Long-term capital gains enjoy a large 0% tax bracket. In 2021, the 0% tax rate for LTCGs income threshold is $80, 800 for married couples filing a joint return; $54,100 for heads of household; and $40,400 for single and MFS taxpayers. The easiest way to look at this is to add all your taxable income together and stack the LTCGs and qualified dividends on top. The portion below $80,800 for a MFJ return is taxed at 0%. Add this to the standard deduction and a married couple filing a joint return can enjoy $105,900 of income without an income tax with this one strategy alone in 2021. This is an incredible tax opportunity for those retiring early. 

A plethora of tax credits are available for low incomers. Your facts and circumstances will prevail. 

The Child Tax Credit (CTC) is a bit more complex in 2021 than in prior years. Portions of the CTC phase out well into the six-figures

Other common credits that can reduce your income taxes are:

  1. Earned Income Credit
  2. Saver’s Credit
  3. Education Credits
  4. Child and Dependent Care Credit

There is also a small credit for nonbusiness energy improvements for homeowners. Then there is the Premium Tax Credit. This is a big credit for those with lower incomes. You can do more research on the PTC here.

There is another new massive temporary tax-free employee benefit made available under the CARES Act. Employers can pay to the employee or the student loan provider up to $5,250 for student loan repayments. This break is available for tax years ending December 31, 2025 or before. That means you have several years to accumulate this tax-free income.

Note: You can’t take the student loan interest deduction if your employer provided the tax-free funds. However, if you made additional student loan payment you may get an additional deduction there as well. Example:

  • Student loan interest: $2,000
  • Employer paid $5,250 of your student loans
  • You paid an additional $2,000 of your student loans.

In this scenario you could also qualify for a $2,000 student loan interest deduction as long as you are below the income threshold. What is less clear to this accountant is if you need to pay the interest out of your funds and the principle from employer funds or not, and how that would be segregated.

One last gift from Congress for those with a modest income. If you have a health savings account qualified health insurance plan you need to fill that HSA savings account. Contributions are deductible, earnings grow tax-free and the whole thing comes back to you outside income taxes if used for qualified medical expenses or Medicare premiums once you turn 65.

Eliminating your income tax requires planning. The government erects obstacles you need to navigate. It is worth the effort. No need to succumb to anti-social behavior.

The Easy Income Tax Deductions

Now we turn to taxpayers with higher income. Some of these strategies apply to people with lower income as well, but the focus in the remainder of this article is on eliminating income taxes for taxpayers with a six-figure or higher income. 

Let’s start with some low hanging fruit. Here are several sources of tax-free income:

  1. Some alimony. Use the link for more details.
  2. Child support payments are always tax-free.
  3. Inheritances, gifts and bequests.
  4. Cash rebates
  5. Most employer provided healthcare benefits.
  6. Foster care stipends
  7. Worker’s Compensation benefits
  8. Disability benefits if you paid for the premiums.
  9. §121 exclusion of up to $250,000 of gains from the sale of your primary residence per person.
  10. Foreign Income Exclusion
  11. Death benefit from a life insurance policy

A source of income I do not consider tax-free income is employer matching in retirement funds because the employer contribution always goes to the traditional part of the retirement plan, even if you elect to have your 401(k) contributions treated as Roth contributions. The income is not tax-free; it is tax-deferred. This is where I disagree with the Root of Good blog post. That post suggested deductions for the current year eliminated income taxes when all it did was push them into the future where tax rates on retirement plan distributions are uncertain.

The same can be said about souped-up retirement plans like cash balance accounts. A lot of money can be deducted currently with these plans and investments grow tax-deferred. But somebody at some point is going to pay the national uncle on the east coast. 


Two Unique Sources of Tax-free Income

Now I want to share what I consider two very powerful tools for generating massive amounts of tax-free income.

The first involves the cash rebates listed above. Most credit and debit cards provide some kind of cash-back these days. Some offer airline or travel rewards. In either case, these rewards are tax-free. 

We need to delineate what is a rebate and what isn’t before continuing. When you get a bonus on a bank account that is interest income. Selling tradelines are also income. What I’m talking about is sign-on bonuses and the continuing cash-back rewards offered by the myriad credit card companies.

This leads to an interesting situation. The sign-on bonuses can be large, say, $500 for $3,000 of spending in the first 90 days, plus the regular cash-back the card offers. Churning cards and manufacturing spending can turn no real spending into large amounts of cash-back fast, which is still tax-free. 

There are so many ways to game the system with cash-back rewards. I suggest a deep dive into Doctor of Credit (DoC) if this interests you. Be warned, this is a rabbit hole. The number of ways to get a steady stream of small incomes is nearly endless. DoC provides a nice ongoing list of opportunities to profit. Subscribing to their mailing list is a must in such situations. (Note: I am in no way related or connected to DoC. This is NOT an affiliate link of any sort.)

Eliminating your income tax requires planning. The government erects obstacles you need to navigate. It is worth the effort.

A Billion Dollars Tax-free

A common complain in my email is that I focus too much on people with higher income. That isn’t true! I spend plenty of time outlining tax strategies for people with lower levels of income. The ones I tend to avoid helping (until now) are the uber-rich! (Except when consulting. Most consulting clients tend to be very high earners.)

One of the most powerful tools for generating tax-free income is the Roth IRA. The mechanics are as such: Money going in is after -tax (meaning it has been taxed already) and money coming out, including profits, are not included in income once you reach age 59½. (In most cases your basis is available for distribution at any age.) 

Most people don’t see the massive loophole. Any asset placed into the Roth grows tax-free. What asset could you possible own that grows really fast, turning a small amount into a really big amount in a short order of time?

Let me give you a hint. There is at least one guy (it is a guy) who placed less than $2,000 into his Roth IRA and turned it into $5  billion! Think about that for a minute: $4,999,998,000 tax-free. Sure beats winning the lottery and anybody can use the same strategy. One particular accountant in the room did, only to a much, much smaller degree.

Peter Thiel, a co-founder of PayPal, started with less than $2,000 in his Roth IRA and parlayed it into $5 billion. So how did he do it? And more important, can you?

Well, let me give you a hint. I have done it, only with a lot smaller balance.

It started many years ago when I ran a small hedge fund. Using my Roth I was able to turn a small amount into a much larger amount, all tax-free. In less than two years I can touch those gains and never pay a penny in income tax ever! Until then I can keep investing and growing the pile more. (The basis is currently available.)

What about you? How can you super charge your tax-free income? Simple. You can either invest in market securities or index funds and enjoy those returns, or, invest in your own company, placed inside a Roth. Cryptocurrencies can also be placed inside a Roth. 

It is the early years of business growth that pound returns north fast. Peter Thiel invests and continues investing in start-ups. You can do that to a lesser extent, but you can easily start a business with the shares held by the Roth. The biggest obstacle is finding an IRA administrator that allows such investments inside Roth IRAs. You may have a local firm that handles such Roth IRAs if you look. You can also check Equity Trust. (Not an affiliate.) Be sure to do your due diligence before moving money.


There are so many opportunities available to eliminate your federal income tax. You can mix and match the strategies listed above and more in an endless number of ways. I spend most days at the office consulting with clients on just such issues. Sometimes my hands are tied and the benefits are limited (still profitable for the client, but limited). Most of the time we crush the tax beast. 

One word of caution before I leave you to your cup of coffee. Never fall for the old trick of lower taxes for the current year only. That is a very easy game to play that ultimately screws the client (that is you, my taxpaying reader). When I work with clients I consider “all years involved”. That means investments into a traditional retirement account requires consideration for the tax consequences when the money comes out.

Now, get creative, but stay legal. You want to keep your money and enjoy it too.



More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi is currently paying 7.5%.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Reduce Your State Tax to Zero with an Inversion

Americans who read the news even poorly know large corporations use tax inversions to avoid massive amounts of taxes due the U.S. government legally. What most Americans don’t know is they can use the same strategies on a smaller scale to never pay state income tax again. My guess is fewer than ten accounting firms in the U.S. utilize these strategies to protect their clients from state taxes. Today I will show you how to use the tax inversion without the help of an accountant.

A tax inversion happens when a major corporation buys a smaller company in a low or lower tax country or municipality. The acquiring company then moves its headquarters to the acquired company’s country. We will not get into the minutia of corporate tax law as it is not the focus of this post. We will use techniques of large corporations where they are applicable to small businesses, landlords, and retired taxpayers living or working entirely within the U.S.

Individuals living and working in a single state will not find value in this discussion. Each state has its own set of tax laws to reduce income taxes a lot, but what we are interested in today is driving the state income tax to zero for business owners and landlords with a few simple moves. Your circumstances will determine how you structure your finances to avoid state income tax.

Small Business

High tax states like California, New York and Wisconsin place a massive burden on business owners of those states. Competing against rivals in low-tax or no-tax states is difficult to impossible.

To facilitate these strategies you will require a corporation (regular or S) or a LLC treated any way you want for tax purposes. Corporations and LLCs are entities and considered persons in the eyes of the law. This sets up some unusual opportunities.

In tax inversions by large public corporation the inversion is handled between divisions within the same company. For small business owners it would work better to have separate entities.

The best way to explain this is with an illustration. We will use my accounting practice, called TPAS here, as an example. Wisconsin is a high tax state and it is darn cold in the winter. We will use a simple example of a company with $1 million in profit for easy figuring.

Your friendly accountant is paying the dirty bastards, ah, I mean the state government, ~$75,000 per year in state taxes on his $1 million in profits. TPAS is located in Wisconsin. All clients are either in Wisconsin or send their stuff to Wisconsin for processing. Therefore, all work is being performed in Wisconsin, subjecting all profits to Wisconsin income tax. The goal: move those profits to a no income tax state.

The owner of TPAS prefers living in Texas. It is warmer and he gets to keep more of his income. The owner of TPAS-WI can’t move his business to Texas without losing most of his clients. As his advisor I tell him he should move to Texas (make Texas your domicile), but keep TPAS right where it is. His company’s profits will flow through to him personally, but because the business is in Wisconsin, Wisconsin income tax is still due.

Our friendly business owner has family back in Wisconsin and he is more than welcome to visit as often as he likes. But I recommend he start another business in Texas, an LLC: TPAS-TX. TPAS-WI will no longer e-file tax returns. Instead, they will farm out the e-filing to TPAS-TX for a fee. This is a high margin product that will in effect transfer a large amount of profit to TPAS-TX. For argument, we will assume TPAS-WI prepares 15,000 tax returns a year and pays TPAS-TX $50 each to e-file and process the acknowledgements from the IRS. TPAS-WI now has $750,000 less profit and TPAS-TX has the same amount of additional profit.

Now a process call “earnings stripping” is applied. TPAS-TX will loan TPAS-WI $3,125,000 for working capital at an 8% interest rate. The interest is $250,000 per annum and deductible by TPAS-WI and reported as income by TPAS-TX.

We have now successfully stripped 100% of the Wisconsin profit and applied it to TPAS-TX. I assume we have two LLCs treated as S-corporations here. The profits from both LLCs will flow to the federal tax return exactly as in the past; the tax will remain the same. However, there is no profit to report to Wisconsin, only Texas, therefore there is no tax owed Wisconsin. Since Texas has no income tax, state income taxes were eliminated.

Art by Tabatha Davis

Art by Tabatha Davis

It is a bit more complicated in real life, but you should now understand the basic mechanics of the structure. The biggest issue is the domicile of the owner/s. The state where the owner lives will be the state that is paid income tax on ALL profits; a credit is given for state taxes paid to other states.

My artistic talent is less than hoped for so I had Tabatha Davis draw the illustrations for me; she is an accountant in my office. There can be more moving parts (and probably will be) in a real life situation. Large companies already do this, but the little guy really needs to as well. The illustrations help visualize the process of getting money from a high-tax state to a low-tax state.


I have several clients who would benefit from this so I hope they are reading. In this scenario we will assume the taxpayer lived in New York City once upon a time and now lives in a state with a lower tax rate. While living in NYC she purchased investment property.

You will only need one LLC for the income properties this time. The LLC can be and should be a disregarded entity. This means you will report your rent income and expenses on your personal tax return for the property as you always have. (You never put real estate inside an S-corporation or an LLC treated as an S-corporation for tax purposes.)

The process is simple. The LLC does NOT have a mortgage with the bank and you as guarantor as most people structure investment properties. Instead, you get the loan, secured by the property, and you lend the money to the LLC. The interest rate charged the LLC can be higher than the bank mortgage rate to you as long as a reasonable rate is used.

Here is what happens. We will assume you have a $1.5 million property with a $1 million mortgage. The interest rate from the bank is say 5%. You charge the LLC 8% on your loan to it. This is called a wrap-around mortgage and common in the real estate industry.


Art by Tabatha Davis

Because real estate has unique tax laws to start with, your property has only $30,000 in profit after depreciation and other expenses. This is still enough profit for property held in NYC by someone living elsewhere to pay a hefty tax. Because the additional mortgage interest is $30,000, the LLC has no profit to report to NYC or NY. You still need to file a return, but that is the end of it.

The $30,000 additional interest to you over the bank mortgage interest is taxed at the tax rate where you live. You can keep the LLC perpetually in debt to you to maximize the ongoing deduction. The federal tax return will report interest income where there were rental profits before; the tax is the same for most taxpayers.

There is a tendency for people to want to charge a bookkeeping fee or management fee to the LLC with income properties. It is a bad idea since this turns rental profits into earned income subject to self-employment or payroll taxes. There is no need to get fancy with income properties. Mortgage interest should easily handle the shifting of income to your low-tax domicile taxing authority without any further need to reduce the tax at the property location.

Retired People

Ten or so years ago a retired wealthy client walked into my office who wanted to reduce his state income tax. He had a home in Wisconsin and was moving here from Illinois. I encouraged him to get a home in Texas and make Texas his domicile. He bought a small home in Texas as his primary residence, owned a second home in Wisconsin and Florida. By avoiding Wisconsin income taxes the Texas home was paid for with one year of tax savings.

Moral of the story: It is okay to visit or even own a home in a high tax state, but never make it your domicile.


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