How to not pay taxes (legally)
This isn’t a post about tax evasion or money laundering, this is going to be about using the systems put in place by the government so that you don’t have to pay income taxes, ever.
The most important thing that we need to understand is maximizing the standard deduction. The standard deduction is the amount of money that you can make each year before the government decides to take some. That standard deduction for the tax year 2020 for married filing joint is $24,800 dollars and typically goes up about $400 per year. For the single folk out there it’s half this amount ($12,400). For the remainder of the post, we will assume you are married filing jointly.
So let’s say that during 2020 you make $45,000 in your household. You decide to max out a single traditional 401(k) at $19,500, and maybe you toss an extra $700 dollars into a traditional IRA. You would have exactly $24,800 left to live off of and would have paid $0 dollars in taxes on that and all of your savings that are going into tax-deferred accounts would also not be taxed.
Now what you might be thinking is “Well what about all of that money that is just waiting to be taxed???” Great question fine reader, I’ll tell you what about that money. Money pulled from retirement accounts is taxed at the same rate as income, and is also subject to the same deduction savings. What this means is that if you pull whatever the standard deduction will be when you’re retired you still won’t pay any taxes on it. That’s right if you are retired currently, and you don’t factor in Social Security (which I would just consider bonus money and shouldn’t be a core part of your retirement plan) you can withdraw $24,800 dollars from the money that hasn’t been taxed and still not get taxed on it.