How Much Do Americans Pay In Taxes
During the fiscal year 2020, the IRS collected close $3.5 trillion, processed more than 240 million tax returns and other forms, and issued more than $736 billion in tax refunds .
The IRS has historically collected the most total tax from California, New York, and Texas these states also had the largest total refunds issued.
Most of the tax burden fell on the highest income earners. According to the latest federal income tax data from the IRS, the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent in 2018.
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Invest In Real Estate
If you want to pay less taxes, you need to change the composition of your income more towards investment income. Earning stock dividend income and bond income are great because they face lower marginal income tax rates.
However, my favorite tax-efficient investment income is rental property income. Because you can deduct all rental property expenses, you can lower your taxable rental income. Further, amortization is a non-cash expense which also significantly reduces your tax liability.
After you have purchased enough rental properties that you can handle , invest in 100% passive private real estate funds like the ones offered from Fundrise. Fundrise manages over $2.5 billion and invests primarily in single-family and multi-family properties in the Sunbelt.
After I had my son in 2017, I sold my hard-to-manage rental property and reinvested $550,000 in private real estate. Its been great to earn more passive income in order to spend more quality time with family.
Cpp And Oas Wont Be Enough
You might be thinking, I have the Canadian Pension Plan and Old Age Security to live off, isnt that enough? In short: no. That total will likely only come to around $40,000 per year, if youre lucky. On top of that, if you retire at 60, youll be eating away at those payments, where they might not even be available 20 years down the road. Given that the average Canadian lives into their 80s, thats certainly something to consider.
Instead, create a portfolio where you can bring in this $50,000 annually from dividends. The best spot is of course the Tax-Free Savings Account , and you can make it to that $50,000 by partnering up. If you and your partner put your cash together, thats a contribution room of $139,000 as of writing. And remember, that contribution limit is increased every year.
Now clearly you wont be able to bring in $50,000 in dividends on a $139,000 investment, but its certainly a start. Say you were to put $100,000 into Canadian Imperial Bank of Commerce that figure would bring in $5,858 in dividends each year. Meanwhile, youve invested in a solid bank stock with a compound annual growth rate of 8.06% over the last decade, and dividend of 5.2% for the same period.
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But There Is A Legal Way To Lower Your Taxes Without Going Broke
As more people become aware of these pitfalls, they are looking for ways to minimize the tax hit they can expect in retirement. One increasingly popular way to do this utilizes a specialized form of dividend-paying whole life insurance to save for retirement, a method discussed by attorney, author and my fellow Entrepreneur contributor Mark J. Kohler in a column titled “Why Life Insurance Has to Be Part of Your Wealth-Building Plan.” Specifically, he points to the strategy I call “Bank On Yourself.”
“The essence of this strategy is to take advantage of the tax-deferred growth on the earnings within life insurance policies by using tax-free loans to access the cash when needed,” Kohler wrote. “So you borrow the money from yourself instead of the bank, then pay yourself the interest and repay the loan you took from your policy.”
These policies provide a way to save for retirement without your having to worry how much of your hard-earned savings the taxman will take.
How is this possible? These policies are funded with after-tax money, which grows tax-deferred and may be accessed tax-free under current tax law.
In addition, money from such plans is not subject to the RMDs that can push you into a higher tax bracket.
Invest In Municipal Bonds
Buying a municipal bond essentially means lending money to a state or local governmental entity for a set number of interest payments over a predetermined period. Once the bond reaches its maturity date, the full amount of the original investment is repaid to the buyer.
Interest on municipal bonds is exempt from federal taxes and may be tax-exempt at the state and local level as well, depending on where you live. Tax-free interest payments make municipal bonds attractive to investors.
Municipal bonds historically have lower default rates than their corporate bond counterparts. A study of municipal bonds from 1970 to 2019 found that the default rate was 0.1% for investment-grade municipal bonds versus 2.25% for global corporate issuers.
However, municipals typically pay lower interest rates. Because of the tax benefits, municipal bonds’ tax-equivalent yield makes them attractive to some investors. The higher your tax bracket, the higher your tax-equivalent yield.
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Let’s Take A Look At Their Financials
Amy earns $65,000 per year at an engineering firm, and Jason earns $45,000 per year teaching third grade at a rural public elementary school in North Carolina. Their combined salary of $110,000 is much higher than the median household income for their community, yet they tend to live just like everyone else around them.
They are really focused on paying as little tax as possible right now, and they take advantage of every opportunity to reduce their taxable income. Amy’s job offers a 401, and she puts the maximum of $18,000 into her account each year.
Amy also contributes $1,000 to her employer-sponsored healthcare flexible spending account to cover their typical medical and dental bills for the year. To cover childcare costs for their toddler, Amy funds her childcare flexible spending account with $5,000 to cover most of the costs during the school year .
Jason’s government job offers a 401 and a 457 plan. It’s a little-known secret that you can contribute the maximum amount to both a 401 AND a 457 account. Jason defers $36,000 into his 401 and 457 plan, making his paychecks embarrassingly small. Thank goodness for Amy’s more robust take-home pay!
On top of all their other savings, Amy and Jason each fund a deductible traditional IRA with the maximum amounts .
Here’s the breakdown of their financial situation and proof that they pay $0 income taxes.
Cutting The Eitc Would Discourage Work And Increase Poverty
From its roots as an idea from conservative economist Milton Friedman several decades ago, the Earned Income Tax Credit has become an increasingly important tool to make work pay more than welfare and enough to lift people working full time at the minimum wage out of poverty. Research has demonstrated the EITCs effectiveness. Nobel laureate Gary S. Becker has written, Empirical studies confirm . . . that the EITC increases the labor force participation and employment of people with low wages because they need to work in order to receive this credit.
Studies of the EITC expansions enacted in the 1980s and 1990s found those expansions induced more than half a million people to enter the labor force. One prominent study identified the EITC as a particularly important contributor to both the recent decrease in welfare use and the recent increase in employment, labor supply, and earnings among female-headed families. The creation of the refundable component of the Child Tax Credit, which like the EITC is available only to families that work, has complemented the EITCs pro-work efforts. Moreover, the EITC and CTC lifted 8.9 million people including 4.7 million children out of poverty in 2010. These refundable credits lift more children out of poverty than any other program or category of programs at any level of government.
Corporations and Small Business Owners Also Pay No Income Tax During Bad Years
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A World Traveler Deducts A $50000 Trip
If you dream about traveling around the world and writing off the cost it might be possible. Tax preparer Jerry Lewin told CNN Money about a client of his who took a multiyear trip around the world with stops in Italy, France and Greece and the client wanted to write off the entire $50,000 cost of the trip. In the end, the client was able to write it off because he published a book about his travels and even though it was published by a very small publisher and only sold 20 copies, it counted as a business expense.
Policy Options To Force People With Low Incomes To Pay Federal Income Tax Are Unsound
Some have implied or suggested that people who do not owe federal income tax are freeloaders who dont have a stake in the system, and that making them pay federal income taxes would improve the tax code.
Yet the vast majority of the people who owe no federal income taxes fall into one of three categories :
As Urban Institute analyst Elaine Maag has written of non-income taxpayers, most are elderly, poor, or unemployed . Whom, I wonder, should the tax man put on the block?
Another Way of Looking at Who Pays No Federal Income Tax
A separate TPC analysis categorized people who do not owe federal income tax in 2011 in a different way.* It found that of the filers who dont owe federal income tax for 2011:
* Rachel Johnson, James Nunns, Jeffrey Rohaly, Eric Toder, and Roberton Williams, Why Some Tax Units Pay No Income Tax, Urban-Brookings Tax Policy Center, July 2011 and Roberton Williams, Why Do people Pay No Federal Income Tax TPC TaxVox, July 27, 2011. For a further discussion of this TPC analysis, see Aviva Aron-Dine, Trends, Milken Institute Review, First Quarter 2012, pp. 5-11.** Roberton Williams, Why Do People Pay No Federal Income Tax?, TPC TaxVox, July 27, 2011*** The remainder of those who do not owe federal income tax, about 13 percent, dont owe federal income tax because of itemized deductions or other tax benefits.
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How Much Of Your Social Security Is Taxable
Its possible and perfectly legal to avoid paying taxes on your Social Security check. In fact, only about 40 percent of recipients pay any federal tax on their benefit.
But heres the caveat: To receive tax-free Social Security, your annual combined, or provisional, income must be under certain thresholds:
- $25,000, if youre filing as an individual
- $32,000, if youre married filing jointly
For married filing separately, the Social Security Administration simply says that youll probably pay taxes on your benefits.
Your combined income consists of three parts:
- Your adjusted gross income, not including Social Security income
- Tax-exempt interest
- 50 percent of your Social Security income
Add those amounts up and if youre under the threshold for your filing status, you wont be paying federal taxes on your benefit.
Even if youre above this threshold, however, you may not have to pay tax on your full benefit. You may pay taxes on only 50 percent of your benefit or on up to 85 percent of it, depending on your combined income.
- For individual filers:
- Combined income between $25,000 and $34,000, up to 50 percent of your benefit is taxable
- Combined income above $34,000, up to 85 percent of your benefit is taxable
Cra: How To Pay Absolutely Zero In Taxes
One of the best ways to pay nothing in taxes on your major purchases and payouts is to leverage the power of the TFSA.
The Canada Revenue Agency delayed tax filing and submission for 2020, but the odds of it happening again next year are relatively low. So in about three to four months, most people will be putting their heads together with their accountants and all their numbers together for their tax filing.
Taxes are an unavoidable financial obligation. Although you might be able to reduce it and minimize the amount you need to pay, achieving absolute zero is nearly impossible. The important word here is nearly.
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Have Lots Of Itemized Deductions
Taxpayers with high incomes can avoid paying income taxes by having lots of itemized deductions. Unfortunately, as a result of the Tax Cuts and Jobs Act, itemized deductions are harder to come by than in the past. They only include deductions for:
- health expenses over 7.5% of adjusted gross income
- charitable contributions
- up to $10,000 in state and local taxes
- home mortgage interest
- casualty and theft losses due to a federally declared disaster, and
- gambling losses .
As a result of these changes, only about 11% of taxpayers will be able to itemize instead of taking the standard deduction. Still, higher-income taxpayers who make substantial charitable contributions and/or have large uninsured health expenses can still avoid paying income taxes.
Use A Health Savings Account
Employees with a high-deductible health insurance plan can use a health savings account to reduce taxes. As with a 401, HSA contributions by payroll deduction are excluded from the employees taxable income an individuals direct contributions to an HSA are 100% tax-deductible from their income.
For 2021, the maximum deductible contribution level is $3,600 for an individual and $7,200 for a family.In 2022, those maximums rise to $3,650 for individuals and $7,300 for families. These funds can then grow without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that when used to pay for qualified medical expenses, withdrawals arent taxed, either.
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Other Things To Watch Out For
While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, its important that you keep things in perspective.
Tax strategy should be part of your overall financial planning, says Crane. Dont let tax strategy be the tail that wags the dog.
In other words, make the financial moves that maximize your after-tax income, but dont make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.
And it could be financially smart to first avoid some of the biggest Social Security blunders.
Dont forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so its important to investigate how your state treats Social Security.
There really arent any tricks, you just have to be careful with your interest and dividends, says Paul Miller, CPA, of Miller & Company in the New York City area.
How To Make $1 Million Dollars And Pay Zero Taxes
Both the news and the social media have been abuzz in the past couple of weeks with the report that President Donald Trump paid only $750 in federal income tax in 2016 in 2017. On the face of it, this seems totally absurd.
After all, $750 is a fraction of what the average middle-income household pays in federal income tax in a typical year.
But heres a not so surprising revelation: Donald Trump is far from the only wealthy American who pays little or no income tax, even on incomes of $1 million or more.
Though many are trying to put a political spin on Trumps low tax bill, the issue really transcends politics. The reality is paying no income tax on a high income is not only common, but its also perfectly legal in many cases.
In fact, there are multiple ways a wealthy individual can avoid paying the federal income tax.
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These 19 Fortune 100 Companies Paid Next To Nothingor Nothing At Allin Taxes In 2021
Analysis shows that during a year of high corporate profits, many of the biggest corporations in America either paid minimal or no federal income taxes.
Corporate profits are surging to record levels, yet many of the nations biggest corporations are barely paying any taxes. Indeed, new CAP analysis of recent Fortune 100 investor filings finds that 19 of the largest profitable corporations in America are paying effective tax rates that are in the single digitsor paying nothing at all.
The figure above highlights the incredibly low rates that these 19 corporations are paying. However, this issue extends beyond the Fortune 100: Other large, notable companies pay similarly low rates. The fact that massive and highly profitable corporations are not paying their fair share is a further illustration of how the corporate tax reforms proposed by President Joe Biden are urgently needed.
How To Minimize Taxes On Your Social Security
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people dont have tax-exempt interest, youre left with one option.
Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security, says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.
Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:
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