The only way we have discovered so far to legally pay no income tax in the eyes of the government is to reduce your income below the taxable level. For single persons under 65 with no other adjustments, this would be $8950 a year. However, there are ways to increase this amount, read on!
First of all, contribute to your Individual Retirement Account (IRA). Contributions to your IRA are not taxed until you retire and start drawing down your IRA account. For 2009, one can contribute up to $5000, or $6000 if you are age 50 or older before 2010. Caution! You cannot contribute more than your taxable earnings, so if you only made $3000 in 2009, your limit would be $3000. This brings our single person under 50 to $13,950 a year before he has to pay any federal income tax. Of course, he won't have that money to spend, but the contribution will offset other income.
If you have any investments, such as stocks or corporate bonds, or even just an interest bearing bank account or Certificates of Deposit (CD) unload them (when they mature in the case of CDs) and switch to tax free municipal bonds. You'll have to pay capital gains on any investments you sell at a profit, but you can dump your losers and use that loss to offset any gains. Unless you have a lot of money, we advise not investing in individual municipal bonds, but to purchase shares in a municipal bond fund. While municipal bonds are probably safer than stocks, cities have gone bankrupt and mutual funds invest in many different bond issues minimizing the risk should one of the bonds go into default. The great thing from a war tax protester standpoint is that your investment goes to worthwhile projects such as a new school or public facilities, instead of corporate greed or weapons of mass destruction. Interest from municipal bonds is tax free, although capital gains should you or your fund sell are still taxable.
If you have rental property, you can make this break even by either reducing rents or by leaving one or more units vacant when someone moves out. I personally like the idea of reducing rents, you can help a war tax protester get by on minimal income by offering a low cost place to live. Remember to allow for repairs and maintainence, as these are deductible from the rental income.
Student Loan Interest Deduction: Unlike most deductible interest, qualified student loan interest is claimed as an adjustment to income.
Tuition and Fees Deduction: If you are still in school, you can deduct college tuition and other mandatory school fees, but it may be more advantageous to take the Hope and Lifetime Learning Credits instead. The calculations are too involved to present here, you will need to consult a qualified tax adviser or do more research on your own if this applies to you.
Health Savings Account Deduction: Health Savings Accounts (HSA) are tax deductible savings accounts that allow the taxpayer to save money tax free for future health expenses. HSAs are paired with high deductible health insurance plans. Earnings in the account are also tax exempt. Withdrawals from the account are also tax free if used to pay for qualified medical expenses. The contribution limits for 2009 are $3000 for individuals, $5950 for family coverage and $900 additional "catch-up" contributions for people 55 and older. Caution! You cannot make contributions to an HSA if you are enrolled in Medicare Part A or Part B. Because of this restriction, it appears to us that HSAs are mostly of value to younger people.
More ways to reduce your taxable income: These don't apply to very many people, so we won't go into depth here, but if any of these apply to your situation, you should take the time to research them.
While you won't want to seek out the following adjustments, if you are unfortunate enough to have them you should take tax advantage of the situation:
Early Withdrawal Penalty: If you withdrew money from a CD or similar account prior to maturity, you probably got hit with a penalty which was withheld directly from your proceeds.
Bottom Line: It is possible for a single person under 50 to shelter at least $12,000 of income from the federal income tax. Married people with children can shelter even more, but the cost of raising children will probably offset any gains.
Don't think it's possible to live on just $12,000 a year? Here is how one person is doing it, with suggestions for others.