Is it possible to pay $0 in taxes on a six-figure income?  Yes it is and here is how you do it.

The tax system is setup to reward those that save.  But half of the country doesn’t have any money saved so that is a tiny problem.  However, if you are willing to put money away you can cut your effective tax rate down to a very low level.  I know this seems absurd but it is possible if you are frugal and careful.  There is no need for offshore accounts or expensive shell companies.  You can do this simply by living below your means.  This is hard in a consumption based economy like our own where everything is setup to encourage you to spend.  In fact, we now have over $1 trillion in credit card debt which means people are spending money they don’t even have today!  So let us get on with the method of how you will pay nearly zero in taxes by utilizing multiple tax shelters.

Paying zero in taxes on a six-figure income

Before I begin, I will state that there are a few key things you need to make this happen:

-Live frugally

-Live in a low to moderate cost of living area

-Not be addicted to spending

So with that, here is the scenario that I found over at Investor Junkie:

Source:  Investor Junkie

It is worth going through each section individually.  Here we are assuming a couple that is both working.  Their combined income is $110,000 per year.  They max out their 401k contributions of $18,000 per year.  Next, one of the above works as a teacher with the access to a 457 account.  This essentially is another 401k for public sector workers.  They put $18,000 here as well.  Next, you are able to stash $5,500 per year in a traditional IRA so you can lower your taxable income.

Next, they utilize their HSA account to the tune of $1,000.  They have a child in daycare and spend $5,000 a year here and are able to adjust their income lower here too.

So with all of that, their adjusted gross income drops from $110,000 to $39,000.  The tax at this level for a couple with a kid is $1,440.  Taking the child tax credit of $1,000 and the retirement credit of $800 they will actually get a refund of $360.

Does this seem farfetched given the median household income in the US is $52,000?  Many families are in a situation like this.  And you can see that there are many tools to cut your tax burden way down.  But the problem is, most do not save and certainly not to this level.

The challenge of course is that the couple in this situation is stashing $65,000 in 401ks, 457, and their IRAs on a $110,000 annual income level.  What that means is that their cost of living must be very low.

Is this doable?  Absolutely if you are willing to be frugal.  Mr. Money Mustache manages to run his household on roughly $25,000 a year.  But of course, that budget supposes a paid off house since housing is the big expense for most Americans.  But even if that isn’t the case, just by trying to be more aggressive with your savings you will realize that reaching retirement is much more doable.  The act of being frugal is the bigger benefit.  Most Americans are going to work until they die because they have no nest egg or exit strategy.  I’ve gotten emails saying “great, that is the problem but what is the solution?”  Well here you go.  Here is one tiny example of where you can save and cut back on your tax burden.

Paying zero in taxes on a six-figure income is doable.

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