For the longest time, I've been a proponent of paying federal income taxes. Federal income taxes among all other taxes collected are used to pay for Social Security (~23% of budget), defense and security (~16% of budget), major health programs such as Medicaid and Medicare (~25% of budget), and other social safety nets. Somebody has to pay income taxes so it might as well be us!
However, when faced with having to do my taxes, I get bummed out that it takes so long. On average, I spend around four to six hours doing my taxes because I've got various assets to report. It's important that I check and recheck all my entries before filing to avoid as many mistakes as possible.
If only we could spend 30 minutes or less doing our taxes. Think about how much more productive our country would be! After six hours, then having to fork over a six-figure tax bill isn't the most pleasant experience. It’s like getting kicked in the crotch after you’ve been kicked in the face!
Given everything is rational, I have a desire to take things down a notch by the end of the year. I would rather make less money to have more freedom and experience less stress. Tax rates are going up and social safety nets are increasing.
However, there's still a weird part of me that feels guilty about paying less federal income taxes! It's almost as if I have Stockholm Syndrome with the government. Therefore, I decided to interview some millionaires who feel little-to-no guilt about paying any federal income taxes at all. Maybe you are one of them and can share your perspective as well.
How To Not Feel Guilty Paying No Federal Income Taxes
First of all, if you are unemployed, underemployed, or struggling to make ends meet, you shouldn't feel bad about not paying any federal income taxes. We all go through our ups and downs. The reason why we pay taxes is to HELP those who are temporarily down get through difficult situations.
Therefore, please utilize the unemployment benefits, stimulus checks, and government subsidies to the maximum. For many, 2020 and 2021 were extremely difficult times.
If you are a traditional retiree who has worked for 40+ years, I don't think you should feel guilty about not paying any federal income taxes either. Paying federal income taxes for decades is great! Thank you for your hard work. Further, there is a chance you might not live long enough to see the benefits of all you've contributed.
What I'm most interested in understanding is how millionaires who are relatively young feel OK not paying federal income taxes. It's the same thing as learning about how some FIRE proponents are OK with receiving healthcare subsidies, even though they are clearly not the intended recipients.
Profile #1: 41-year-old with two kids and a $3 million net worth
I haven't paid federal income taxes for five years since I retired at age 36. I don't feel guilty because I already paid over $500,000 in federal income taxes when I was working in IT.
Except for sending my kids to public school, we don't consume much of the government's resources. We also spend less than $50,000 a year.
We pay property tax each year which partly goes to our public school system, parks, sanitation, roads, fire department, and police department. In addition, we pay sales taxes and a small amount in state tax.
If the government was more efficient and less corrupt, maybe I'd be willing to pay more federal income taxes. However, when you have Elizabeth Warren claiming she was Native American to get ahead, Donald Trump paying only $750 in taxes the year he got elected and no taxes for 10 out of 15 years, and Congressional insider trading, come on now!
Why the hell would I ever feel guilty not paying federal income taxes when many of our leaders are corrupt?! I hope more of our leaders set a better example.
Profile #2: 39-year-old with no kids and a $1.6 million net worth
I haven't paid federal income taxes in the past two years. In addition, I get a 70% healthcare subsidy under the Affordable Care Act because our income is less than 200% of the Federal Poverty Limit. If we had no healthcare subsidy, a silver plan would cost over $2,000 a month.
I know we aren't poor, but I've got a chronic medical condition that prevents my husband and I from having kids or ever feeling fully financially secure. My job was damaging my physical and mental health so my husband, who is one year older, left his day job to spend more time with me.
I don't feel guilty that I don't pay federal income taxes because I already paid into the system for 17 years. Also, I have a chronic illness which I don't think anybody would wish for in order to avoid paying federal income taxes or get healthcare subsidies.
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 taxes.
Profile #3: 43-year-old and 39-year-old with two children living abroad and a $2.5 million net worth
We haven't paid federal income taxes for over seven years because we live abroad. Based on the Foreign Earned Income Exclusion amount of $108,700 in 2021 ($112,000 for 2022), we didn't have to pay any federal income taxes. Why should we? We were not consuming any American resources.
Meanwhile, we actively did Roth IRA conversions when our income was down and strategically harvested capital losses to offset any capital gains. As a result, it was very easy to minimize or eliminate our federal income tax bill. We still had to pay some local taxes to the foreign government, as we should, but they were minimal.
When my wife and I plan to return to America, we will likely not have to pay federal income taxes either. The 2022 standard deduction amount is $25,900. We'll probably get a mortgage when we buy a house, which means we'll be able to reduce our income by the annual interest amount. Further, we get child tax credits for two children under six.
We will strategically earn most of our income from investment income, which is taxed at a lower rate. Further, we'll work just enough to cover our estimated annual living expenses of about $60,000 a year.
With how bloated and inefficient the U.S. government is, paying federal income taxes is a waste of money. I don't feel guilty paying zero federal income taxes at all.
The Net Worth Sweet Spot To Pay No Federal Income Taxes
I purposefully highlighted the perspective of three millionaires because they are in the sweet spot for paying minimal federal income taxes. In the past, I've wondered how millionaires can pay zero federal income taxes. But I realized that so long as your liquid net worth is under about $3.5 million and you're not working a W2 job or aren’t earning much from one, it's feasible.
After your liquid net worth is over $3.5 million, it's much harder to game the system to pay less tax. But of course, you could live in a $5 million mansion and have your entire $3.5 million invested in growth stocks that pay no dividends. If so, you could easily pay no taxes if you don't have W2 income.
The key to paying less federal income taxes is having not too much investment income and plenty of expenses as a business owner. You also need the appropriate level of income per household size to receive government benefits, as the Federal Poverty Limit chart shows above.
For a family of four, earning up to ~$70,000 a year in income gives them a great opportunity to pay no federal income taxes, especially if most of the income is investment income. However, if you're just a family of one, earning up to about $30,000 a year will also give you a good chance to not pay federal income taxes. In other words, you can live a Lean FIRE lifestyle and stop paying your income taxes.
Remember, the standard deduction limit for an individual is $12,950 and $25,900 for a married couple. The current maximum 401(k) contribution is $20,500 and then there are random tax credits. Such limits tend to go up each year.
Percentage Of Americans Who Pay No Income Tax
Below is a chart by Urban-Brookings Tax Policy Center that forecasts roughly 101.7 million out of 178.1 million tax units (households or individuals) won't pay taxes in 2021. That's 57.1%, an improvement from 60.6% of tax units that didn't pay taxes in 2020.
It's interesting the Tax Policy Center forecasts only 37% of tax units won't pay federal income taxes in 2031. I find that forecast to be highly optimistic since once you get something for free your expectations are set. But if the Tax Policy Center is correct, then this is a bullish data point for our future economy.
Do You Feel Less Guilty Paying Less Taxes Now?
After conducting this exercise, I will feel a little less guilty if I start paying less federal income taxes. If I work less and make less, then of course I should pay less in income taxes. After all, most working Americans don't pay federal income taxes.
However, I'm not sure I'll fully be able to overcome the guilt of paying zero federal income taxes as an able-bodied American. This country has given me so much since I landed in the suburbs of Washington D.C. in 1991. I feel very fortunate to have had so many great opportunities to earn as an employee and now earn as a solopreneur.
Further, it's nice to make more than the $70,000 a year threshold as a family of four to pay no federal income taxes. My kids are young and we want to spend more money on education, food, housing, and trips, especially if I will be entering decumulation mode soon.
Perhaps after our kids have left the nest we will downsize to a smaller house and strategically reduce our income to lower our tax liability. My plan is to give away as much wealth as comfortably possible while living.
In conclusion, I still think everybody should pay some federal income taxes, even if it's just five bucks a year. Like donating to charity, it feels good to financially contribute something to help our nation. It feels great to have skin in the game. And if we can't contribute financially, hopefully we can contribute with our time.
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Readers, would you feel guilty if you didn't pay any federal income taxes? If you don't pay any federal income taxes, how did you overcome the guilt, if any? I'll gladly add your perspective into the post.