TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, March 27, 2008

Money Magazine: How to Pay Zero Taxes

How to Pay Zero Taxes:  Nearly 50 Million Americans Do It; But Once You See How, You'll be Glad You're Not One of Them (Money Magazine), by Marlys Harris:

Money_chart_2Last year 49.2 million U.S. households filed returns that obligated them to pay absolutely no federal income taxes -- and they didn't necessarily do anything illegal. Before you start gnashing your teeth at the injustice, however, you should know that there are many reasons to be happy that you're not one of the tax escapees.

For starters, avoiding U.S. income taxes isn't easy. Citizens can't wriggle out of their bills by moving to another country because, almost alone among nations, the U.S. taxes all income, no matter where on earth it's earned. And although the tax code offers plenty of deductions and exemptions, if you take too many you'll be skewered by the AMT. ...

So how do the 49.2 million do it? That's what Money Magazine set out to learn. What we found offers a glimpse into the workings of the immensely complicated U.S. tax system, as well as valuable lessons in the dos and don'ts of cutting your own taxes.

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So what that these people paid no INCOME taxes? per the article (in the link) "The vast majority of the members of the zero-tax club are on the opposite end of the income spectrum. Some 92% of zero-tax filers earn less than $30,000 a year"

For that filer earning $30K, remember that filer is a TAXPAYER who pays FICA (or worse SECA) + Medicare tax that eats up 10-20% (percentage obviously rounded up) of their income. 30,000 drops to 24-27K (with probably no benes like health insurance, 401(k), etc etc). There are taxpayers earning six figure salaries whose effective tax rate (income + fica + medicare) after credits and deductions is lower than the $30,000 taxpayer who pays SECA.

No doubt those 92% also live in the world of RALs (for their refundable EITCs and w/h or estim. tax pmts) and Pay Day loans which eats even more of the little salary the 92% earn.

Call me a bleeding heart liberal, but I actually feel bad for the 92%--many of whom are living near or below the poverty line--who suffer the oppression of the most regressive of taxes (fica/seca). not that i am anti fica/seca, they are just among the most regressive taxes we have.

imagine if someone suggested lifting the FICA cap (or just lifting it a little/enough--say 50-100K?) to give the 92% a refundable credit for the fica/seca tax they pay (i know i know--1/2 of seca is deductable. so just give them a refund of the half (8+%) that's not).

sorry, that would only help the poor. ok, give the FICA/SECA credit on the first $30K earned to TPs whose incomes are not in the top 10% of GI or AGI or MAGI (i.e., include the middle class). sorry, that would hurt the rich but not the wealthy (in my world "rich people" work for a living--earning wages/SE income; "wealthy people" do not work for a living so they do not earn wages/SE income and thus do not pay fica/seca).

wait a tic, this might be the winning combination. isn't it the wealthy who fund the politicians and not the "rich" (who work for a living but can't afford to throw around THAT kind of money to politicians by the handful)? so if the wealthy get off, the poor get paid, and the middle class gets a break, and only the rich--but not the donors--are left to complain isn't that political tax policy gold?

there. now can i be excommunicated? (it is off the shelf project because the wealthy get off; it is anti-academic (tax law wise) as it does not achieve horizontal or vertical equity--only moral equity and justice (well, my sense thereof; maybe not anyone else's)--which does not fit in any tax policy category i learned of; republicans can't endorse it as it "raises" taxes or sounds like it does--even though i think it could be revenue neutral and meet pay-as-you-go rules; democrats can't endorse it because it lets the wealthiest americans off the hook--and probably does not go far enough in terms of helping the poor or middle class; so who am i preaching to?)


Posted by: Adjunct Law Prof. | Mar 27, 2008 8:21:00 PM

Why slay the middle class, "Adjunct law Prof"? Why not keep the cutoff at its current amount, but reinstitute it when you reach a heightened earnings level, like, $250,000? On Long Island, with $100,000 salary, you are living paycheck to paycheck, no savings, in you luxurious 3 bedroom undormered cape on a 60ft by 100ft lot with RE Taxes of $9,500. And because you had the luck of having three kids and a wife who works part time, you also pay AMT because your SALT are so high. And now you want ME to pay for some other sap down the block who his whole life has been a fatass lazy TV junkie while I worked and flipped burgers in high school and busted my butt in college (with a part time job to help pay for it..) and took out $100,000 in loans while he spent all his earnings on a nice BMW on his lousy landscaper salary!! I'm sorry, but piss off!! I am barely making it by on my "rich" salary and payments on my second hand Ford to then go lumping me with my neighborly miscreants' poor ill thought out spending problems!!

Posted by: Little Man Tax | Mar 28, 2008 9:09:04 PM

Little Man:

I grew up on the Island, and flipped burgers in H.S. & college too (you may have purchased one from me at the beach). I know all about living on the Island (and various other high cost areas on the east coast) and that $100K doesn't go as far as it used to--or in fact far at all. I know all about trying to support a family with a wife who stayed at home to raise the kids--so my $100K was all there was. i was never "rich." i bled my savings from the good days to stay afloat. My $100k could not support my family, so I know of where you speak. Walk a mile in my moccasins before you cast your stones at me, and judge not lest ye are ready to be judged right back at ya.

I have no problem with your suggestion to cut off the employment taxes at 100K and reinstitute them at $250K. But remember that benefits are based on what you pay in--that is why i suggested having the poor & middle class pay in (so they get their benefits) but give them a refundable credit so they get the money back). As $150k can be VERY middle middle class, I would hate to see people in that category lose 1/3 of their benefit later because they didn't pay employment tax on 1/3 of their income.

Again, my proposal was in part a stream of consciousness rant that will never be enacted and can be eminently perfected. I don't have all the answers (don't tell my students that), but if people would start discussing and trying to solve this problem, at least there might be some action. Any action will be flawed--it's politics; people like to hate on the IRS, but CONGRESS passes these laws and it's the President who signs off on them--but some change would be better than nothing.

And Little Man, just because a guy's a landscaper doesn't mean he doesn't pull in a nice income. And if he is in the 92% pulling in less than $30K a year, I doubt he has the credit to get that BMW or make the payments. (Make sure the repo men don't come and tow away your Ford by accident!)

The 92% making < $30K are living paycheck to paycheck--just like you. And look at my proposal again. You are not "subsidizing" someone who earns > $30K (the top 8%)--they pay in to the system, so they are entitled to get benes out.

The national sense of "entitlement" and the lawyerly instinct for "elitism" never escapes to floor me. Just because you went to law school you are not entitled to a BMW and a mansion on the North Shore. If you are living on the Island and pulling in less than $160K a year that means you are not at BIGLAW. This is either a choice, or based on the law school you went to and how well you did. The fact that you may have went to a 3rd or 4th tier law school, or be in the bottom 50% of your class, or you chose a low paying job, or you went to a good school and got good grades and hit a rough market is not the landscaper's fault.

I believe in the concept of noblesse oblige. Maybe I scored wrong on the amount that it takes to be "rich"/"wealthy" but that does not change my belief that with wealth, power, and prestige come social responsibilities. If you can find an easy way to adjust the income tax, employment taxes, or the definition of "rich"/"wealth" for regional cost of living differences, please feel free to opine. I would welcome it. But for now, the tax system does not account for regional cost of living adjustments (or does so in a minimalist amount).

Instead of hating on me, try loving your neighbor. Maybe that way you'll get some free landscaping and a ride in the Beemer.


ps: Save the Oak Beach Inn! (I should say: Rebuild the OBI! I can't believe they torn it down.)

Posted by: Adjunct Law Prof. | Mar 30, 2008 3:13:20 PM