$100,000 a year with $0 income tax

Steve Cummings

The American tax system to so many people is confusing, convoluted, crazy, and cool. Oh, I said cool didn’t I. Well, the thing is that I have been doing some calculating and I found out that you could be making $100,000 a year and pay $0 taxes. That's right, no taxes. How cool is that? Saving some money on income tax is something I like to do. 

Spending too much on taxes

Most people really do not know how to do this. Lots of people would rather spend their money instead of paying less taxes. I am not most people.

Living in a world where you see others using the tax system and making gains had me thinking. How can I do this too? Have you ever wondered how the rich stay rich?

Frugality helps to save on taxes

These concepts are quite simple, but it takes time and discipline to knock these things out. Plus you need to learn how to be frugal.

Once you learn how to be frugal you can save more money, invest more money, and eventually retire early because you will have reached Financial Independence.

So many people I know just like to spend spend spend. It takes some discipline to be able to master frugality. Once you can be frugal the money starts rolling in. 

One way frugality can help you is with taxes. If you are making a lot of money, and investing it in tax advantaged accounts you can then save more on taxes.

If you are not using these accounts to your advantage you are throwing away money, and the US government likes to take a piece. I have created a scenario of a family that can take advantage of the tax system to pay less taxes.

Our Scenario Family

Let's start off with our scenario. I hope you all can follow. 

You have a family of three. Father, mother, and of course that lovely red headed child. This is your family and the husband and wife’s income together is $100,000. The red headed child does not make any money yet. Tax rate would be 22%. At a marginal tax rate the taxes would be $13,580. That is a lot of money. My goal is to show you how to make that number to $0.

Let's Explain the Marginal Tax Rate

In America, the income taxes are done by a maginal tax rate. So instead of having a flat tax of a certain percentage, you will have taxes that go up depending on where your income lands in the margins.

For example: the family that has an annual salary of $100,000, will have to pay $1975 for the 10% on $19,750.

Then they would have to pay $7,259.88 on the amount that is between $19,751-$80,250, which is taxed at 12%.

Then the $100,000 – $80,250, which is $19,750. You will multiply that by 22%, which equals to $4,345. If you add this all up the taxes will equal up to $13,580 for taxes.

Here is the Marginal Tax Rates for 2020.

Saving money through using 401ks.

First thing is first, you need to lower your income. 

Most companies nowadays give their employees a 401k, 403c, or 457. These are typical for most companies. You have the ability to max that out at $19,000 for the tax year of 2019. This money is done pretax.

If the mother and father both do this their income will lower. If you have a good enough company that offers some sort of match, you will then have free money going to that 401K. So take advantage of free money, and a way to put your money in a tax advantaged account. 

Maxed out 401K equals $38,000. We now subtract that from the $100,000. Boom!! We have $62,000 Adjusted Gross Income (AGI). The tax rate is now at 12% owing $7,045. Not so bad.

Saving Taxes by using an IRA and a HSA.

Lets keep this money train going. 

Both parents have an IRA that they contribute to. The max for tax year 2019 is $6000. Both of the parents max that out subtracting $12,000 from their income. Now their income is set at $50,000 still owing that 12% mark with $5,605 in taxes.

If you had a high deductible health insurance plan you could have an HSA. That means you need to have a deductible of $2700 for a family. Now we can put $7000 aside for the HSA plan. Your income is at $43,000 which you will owe $4,765. That is great news.

Standard Deduction and a Child Credit

Lastly, there is a standard deduction of $24,400 for a married couple filing jointly. You can subtract $24,400 from your income and you will be left with $18,600 with a tax rate of 10%.

At 10% tax rate, you will have to pay taxes of $1860. I know you all are probably thinking, “Steve that is not $0 taxes.” you are right. I do have another trick up my sleeve. 

Since you have one child you can use a child credit to deduct these taxes. For tax year 2019, the child credit is $2000. That is for each child you may have. There are other credits you may be able to add on like interest from a home loan, but I decided to make it quite easy for you. 

How about that? A family of three making $100,000 a year is now paying $0 taxes.

Other ways of saving on taxes.

There are many alternative ways to never pay taxes. There is a way of living abroad like me. I use the FEIE, which stands for Foreign Earned Income Exclusion. It excludes $105,000 USD that I earn abroad as long as I am outside of the US. for 330 days. That is not bad for me. As an expat you do have some perks from living abroad.

Other alternatives to save taxes would be:

  • Interest deduction from a Mortage loan
  • House depreciation
  • Owning a business can help reduce taxes
  • Many other different credits

Another easy way to do it, would be to make $80,000 in capital gains or dividends. These gains and dividends are taxed at 0%, and then you can use the standard deduction to deduct the leftover income from the $100,000 and you are left with a $0 tax bill. 

Stop paying too much in taxes

Remember it all starts with the ability to stop spending money. Once your spending habit is crushed, and you can save the money, you can then save more money through investing and tax avoidance. 

I hope this helps. Go and save some money, invest it, and stop paying taxes. 

Any fun other tax tips please leave a comment. I am always willing to learn more.

” Spend less than you make, stay out of debt, and invest the rest”

3 thoughts on “$100,000 a year with $0 income tax”

    • You start easily with opening an account with Vanguard or even M1 Finance. You can open up an IRA or Roth IRA and start investing with a simple Total Market ETF like VTI. That is what I do. It keeps investing simple and I can have a piece of all the best companies in the U.S.


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