You've probably heard about the famed 47% of Americans who pay no income taxes at all. How do you join this club? There are several ways.
Have Little or No Income
One easy way to pay no income tax is to have little or no income. About half of the 47% of Americans who pay no income tax do so because their incomes are too low. Because of personal exemptions and the standard deduction, they end up with no taxable income each year. These are childless adults with earnings of less than $15,000 per year and families that earn less than $30,000.
If you'd like to live on that amount of money, you won't have to pay income taxes.
Working families with modest incomes (although not necessarily living in poverty) and dependent children can avoid paying income taxes because they are given special tax breaks: the child tax credit, the earned income tax credit, or the child and dependent care credit. For example, a family of four (husband, wife, and two children) with an income of $45,000 would receive $1,000 tax credits for each child and a $450 earned income tax credit. When combined with their personal exemptions and standard deduction, they end up owing no income tax. Indeed, since the child tax credit and EITC are refundable, they get money back from the IRS.
Families such as these account for one-seventh of the 47% who pay no taxes.
More than one-fifth of the 47% who pay no income taxes are retirees with relatively modest incomes (although not living in poverty) who benefit from tax breaks for seniors. The most significant exemption among these is the tax exemption for most Social Security benefits.
Have Lots of Itemized Deductions
Taxpayers with high incomes--$100,000 or more--can avoid paying income taxes by having lots of itemized deductions. These include deductions for mortgage interest, charitable contributions, and health expenses. They may also have tax-exempt income from investments in things like municipal bonds.
13% of the 47% who pay no taxes fall within this group.
Finally, it is quite easy to pay no income taxes if you're extremely rich. In our tax system money is only subject to the income tax when it is earned or when an asset is sold at a profit. You don't have to pay income taxes on the appreciation of assets like real estate or stocks until you sell them. Moreover, there is no tax on consumption or on borrowed money. Thus, the simple strategy of the super-rich is to buy assets like real estate and stocks and hold on to them, and to borrow against them when needed to finance their lifestyles. They don't have to pay any taxes at all on their borrowed income.
There aren't that many rich people, so the number of super-wealthy taxpayers who actually take advantage of this strategy is quite small: The IRS reported that in 2011 9,000 taxpayers with incomes over $1 million who paid no income taxes.