Smart TaxesSmart Taxes

It's not that hard to pay zero taxes

Add up deductions, credits for children, a few other credits and soon you're up to $79,000 in tax-free income.

By Jeff Schnepper Feb 5, 2010 11:40AM

You knew I had to get around to this one eventually.

 

In 2004, 2,833 individual tax returns were filed showing incomes of $200,000 or more with absolutely zero U.S. income tax liability. In 2005, the number jumped to 7,389, increasing to 8,252 in 2006. I’m still waiting for updated figures, but you get the idea.

 

These people were able to avoid paying taxes by the use of sophisticated tax strategies devised by high-priced and very professional tax planners, who guide their clients along the cracks in the Tax Code.

 

But, it’s not too difficult for you to get the same result.

 

Let’s take a family of five, husband and wife with three kids in grade school.

 

For 2010, on a joint return, they have a standard deduction of $11,400 plus personal exemptions of five times $3,650. That means the first $29,650 in income is taxed at zero.

They also have three kids under age 17. The child tax credit of $1,000 per child shelters the next $25,583 in income.

 

That means they can earn $58,233 and still pay zero income taxes.

Let’s say they paid $6,000 in qualified child care. That’s another $1,200 in credit that brings our sheltered earnings up to $63,233.

 

Let’s say mom took a class at the local college and borrowed $4,000 to pay for tuition, course materials and books. All qualify for the American Opportunity Tax Credit.

 

That wipes away another $2,500 in taxes.

 

Now our ZERO tax earnings are up to $79,900 -- and we didn’t even have to itemize.

 

That’s why every few years you should sit down with a tax professional, even if you do your own taxes. It’s more than finding out what you don’t know. It’s also making sure what you think you do know is right.

 

And, it’s deductible.

 

Related reading:

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