how to pay less income tax

Mr. Liberty


Taxes.  It’s that day – the day the bloodthirsty government takes its pound of flesh out of you to pay for the programs and causes we (as a people) have voted for, again and again.
Medicare, Social Security, the wars in Iraq and Afghanistan (and before that, the Cold War), and public roads, schools, libraries, safety and health are all part of that check you cut.  It’s a tough burden to bear – and Americans pay less in taxes than any country save Iceland and Ireland – but we are tough enough to bear it.

I’ve found the awful but foolproof way to pay less income tax this year. Earn less.  It’s not the answer anyone wants to hear, but it’s true on several levels:

  1. Earn less income and you’ll pay less tax.  Everyone knows this.  Lose your job, and if nothing else your taxes go down.
  2. Earn less income and make more money through capital gains, dividends, interest income and other “asset-generated” means and you’ll pay less tax.  This method is what makes millionaires.
  3. Earn less income and you’ll qualify for all sorts of benefits that you won’t get as a  middle class American.  Medical benefits, tax credits, unemployment, government housing and thousands of other benefits will suddenly become available to you as you earn less.

Living in New York, I always realized that there was a weird economic situation going on:  you can live easily in Manhattan (or New York in general) if you are very rich OR very poor. I’m not equating the two – being rich is much easier, of course.  But if you can qualify for government-subsidized housing you can live across the street from multi-million dollar homes in Manhattan.  If you are middle class, you’ll get squeezed.

If I can step outside my own life and look at it from a distant perspective, I’ll be interested to see how my 2009 tax bill shapes up. I’ve ratcheted up insane medical bills (through COBRA premiums) against minimal income.  If I owed 2009 income taxes today, I’d be impoverished.  My net worth is still fairly high – I’m living off liquidating some assets right now – but as far as income goes, I’m staggering along far below the New York/New Jersey poverty line.  I should show up as impoverished, and I’ll be interested to see what that does to my tax bill.

So as this recession deepens, I’ll tell you how to pay less income tax:  earn less income and buy more income-generating assets. The US tax code favors people who earn less from income and earn more from income-generating assets – it’s that simple.  Looking at a business owner or a corporate lawyer generating the same income but from different sources, the business owner will win.  When the tax deadline comes on Wednesday, you want to be earning less.

photo credit: TheeErin

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13 comments

  • Chad @ Sentient Money

    “The US tax code favors people who earn less from income and earn more from income-generating assets – it’s that simple.”

    So, true. Buffett always points out that his secretary pays a higher tax rate than he does, because he gets all of his money from income producing investments and she gets her's from a salary.

  • You have hit upon one of the biggest reasons to pay-off a mortgage. A home that you own (and not the bank) can provide you shelter services month after month, i.e., imputed income, but it's all tax-free. As tax rates go up and investment returns remain uncertain, this benefit becomes even more valuable.

    • I disagree with you. Try not to pay property taxes on your house (even when fully paid off) and see WHO really owns your house!

  • Sad, but true.

  • Thr Rich pay 15%

    The working person pay 25% or more so true

    Im on my way to become my own boss

  • guinness416

    Can't speak to Iceland, but I have a feeling that ain't going to be true of Ireland much longer!

    My in-laws in NYC make about $40k + what they make renting their basement out and a few other odd-job style things. They have a nice house in Forest Hills and a good lifestyle. No dinners in Per se or full price tickets to MOMA, but a good lifestye. It is possible.

  • You know, Steve, I really don't mind paying more in taxes, at least some taxes (and I am a softcore libertarian). If I'm paying more in taxes, it means

    a) I am making more money (a good thing, for the most part);

    b) I don't have debt (no mortgage deduction);

    c) Live in a state with no income tax (you're going to one of those);

    d) Or sales tax (you're out of luck there);

    e) Have a fair amount of interest and dividend income (I save); and

    f) Don't have any of the special-purpose deductions (a mixed blessing, but I think on the whole positive).

    I have filed a Schedule C for my LLC for the past 15 or so years, and that gives me some decent deductions, though not perhaps worth the effort that I put into my business. But paying lower taxes may not entirely be a badge of honor.

  • I'm totally with you on this one… I hate it when people that make more money complain about paying more in taxes.

    Fine. Go back to making $30,000 then. See how you like it.

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  • I'm totally with you on this one… I hate it when people that make more money complain about paying more in taxes.

    Fine. Go back to making $30,000 then. See how you like it.

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  • but why will i choose to be unemployed rather than having a job and paying taxes? yes its true that if you dont have a job taxes are not that high but still its better to have a job paying taxes than not having a job at all.

  • There are lots of good suggestions here. I plan on taking advantage of some of the good ideas I’ve found here. Even though there is no way around paying federal income taxes in this country, there are ways to avoid having to pay the same % as someone else in your tax bracket. By studying accounting and then actually passing the national CPA exam. This type of training will teach the ways of avoiding paying what everyone else pays. Over the last two years I have paid a total of $211.00. There’s not too many people out their that make 50k plus a year and pay such little income tax. Hopefully this helps you in the same way your site helped me.