To pay nothing, earn little
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, according to the Tax Foundation, a non-partisan research group in Washington, D.C. That doesn't include another 15 million who earn too little to file in the first place.
Your annual income wouldn't have to be quite as low as you'd imagine for you to be free of the income tax. Because of deductions, credits and exemptions, a family of four can earn about $43,000 and pay nothing. For a single person without kids, that threshold is $10,300.
Over the past decade, Congress has removed more and more people from the tax rolls by increasing the size of those adjustments. The personal exemption, for example, rose from $1,000 in 1980 to $3,400 in 2007. Additionally, low-income families receive a $1,000-per-child credit and a special credit for the working poor.
Few among us would want to settle for a drastically lower income just to avoid taxes. But David Gross did just that. After the 2003 invasion of Iraq, the 39-year-old technical writer decided that he didn't want his tax dollars funding the war. Only by earning less, he realized, could he stay within the law.
At the time his salary came to about $100,000 a year. He asked his employer to pay him far less - some $70,000 less - but was turned down. So he quit and launched a business from his apartment, strictly limiting his earnings.
In 2007 his income was $29,000. He put $2,850 in a health savings account, $4,500 in a simplified employee pension (SEP) and $4,000 in an IRA. Since he works freelance, he can deduct half of his self-employment tax ($1,850) and his health insurance premium ($1,200), leaving him with an adjusted gross income (AGI) of $14,600.
After taking the standard deduction and one exemption, his taxable income neared $6,000 and his tax was $493. Low-income earners like Gross are also entitled to a credit for retirement plan contributions. His came to $500 and - poof! - no tax bill.
Because he's saving so much, Gross has to pinch every penny. But even though he lives in San Francisco, one of the nation's most expensive cities, he says, "it turned out to be a lot easier than I thought." Most places he goes are within walking distance, working at home gives him time to cook, and he and his girlfriend (who does pay taxes) rely on Netflix-rented movies for entertainment.
Gross believes in the government's right to levy taxes - he still pays California taxes - but he's satisfied, he says, that he hasn't been financing what he calls "the hugely bloated military."
Can You Do This? You probably don't want to emulate Gross' ascetic lifestyle. Face it: Earning less is a great plan - unless you like to eat dinner out, go to the movies once in a while and own a car. But don't ignore his example of grabbing every retirement tax break you can find. You can reduce your income and enhance your financial security by funding a 401(k), an IRA, a SEP or a health savings account.
