(I was feeling a little frisky today, so this one is fun….)
Several years ago I wrote a post with a rather obnoxious title, Never Pay Taxes Again, in which I outline our strategy to minimize our tax burden in the years to come. It is still one of the most popular posts on this rather obnoxious blog.
Then I recently outlined how we’ve paid no income tax for 4 years while increasing Roth accounts from $0 to $100k and raising basis in our stock portfolio by $145k. Not only was this all tax free, but will be tax free forever.
As you might expect, quite a few people have taken time out of their busy schedules to express their opinion about the taxes of a guy who writes stuff on a blog. There is something truly magical about the Internet that encourages this kind of sharing.
The strongest opinions seem to come in 3 main forms:
Anger:
“You are the scum of the earth and a truly disgusting individual.”
“This just goes to show that the US tax system only favors the rich.”
(Faux) Concern:
“That’s great for you. What about the orphans, the homeless, and others in need? What about roads, police, hospitals, and other important infrastructure?”
Elation:
“Yeah! Tax is theft! Bring down the system, man!”
I also have an opinion. And since this is my blog…
It’s great to be passionate about this stuff. While passion alone probably just leads to ignored and deleted comments, passion combined with knowledge and understanding can be a great tool for change.
So here are some fun and interesting things about the US tax system.
The US Tax System…
The US tax system is convoluted, obtuse, contradictory, and expensive… yes, all of those things.
It’s also ridiculously generous. To everybody.
All Americans benefit from some of the lowest tax rates on the planet, in addition to:
- Low income households get the Earned Income Tax Credit.
- Students get subsidized education loans.
- Working class families get:
- tax deductible 401ks and IRAs
- the Saver’s credit
- Child Tax Credits
- the Childcare tax credit
- no capital gains on the sale of a primary home.
- The self-employed get depreciation and home office deductions and subsidized healthcare.
- Retirees get low dividend and capital gain taxes.
- Older retirees get tax-free (or nearly tax-free) Social Security and Medicare benefits.
- High income families and people in SF and NYC get mortgage interest and property tax deductions.
- Landlords get depreciation deductions.
- Corporations get deductions for Research & Development (amongst others)
- Oil companies get deductions for whatever oil companies do.
- Hedge fund guys and gals get tax-free carried interest.
- Politicians get assistance with the cost of their re-election campaigns.
- Lobbyists get well paid jobs.
- Accountants and lawyers get to charge high bill rates for doing all of the paperwork.
There is literally something for everybody.
Now that we have a partial list of commonly used deductions and tax advantages, let’s have fun with future passionate comments.
When complaining about how we pay our legally required tax obligations and no more, please also include a list of the tax benefits you are eligible for but choose not to use.
Some examples:
- I own a home and can claim the mortgage interest and property tax deductions, but I choose not to. Here is a copy of my Schedule A for verification.
- I was eligible for a few grants and subsidized student loans, but I chose not to go to college instead. Here is a photo of me working for minimum wage while I save money to pay full tuition.
- I was going to make a deductible contribution to an IRA this year, but I decided I would rather work longer before retirement. Here is a copy of my IRA statement showing a balance of zero.
- We sold our house for $500k more than we paid for it. I thought it was silly that I didn’t have to pay any tax on that gain, so I sent 25% of it as a gift to the US Treasury. Here is a copy of the check.
Thank you kindly,
Go Curry Cracker, a truly disgusting individual
How much extra $ do you gift to the US Treasury?
Thanks for playing along :)
The best travel is FREE travel.
See how we enjoyed $10,000 in free travel through Europe via the use of credit card rewards programs.
Haha! I gift the US Treasury absolutely nothing, but I do pay my taxes every year. That seems like a pretty fair deal.
Honestly, I think it’s fantastic you guys don’t pay any taxes. It’s not like you’re cheating on your taxes or anything…you’re just using the tax code as it was written.
Nothing wrong with that!
Writing a blog about it does tend to attract negative attention, but don’t let it bother you! Trolls will be trolls.
Sometimes trolls are fun.
Great post GCC. For the years I lived in high tax countries earning income there, I used the foreign tax credit to offset my US taxes – the beauty is the “excess” tax you paid to the foreign government (beyond what the same income would have as taxes in the U.S.) is allowed as tax credit that you can use to offset your US tax obligations dollar-for-dollar. Also, this tax credit can be carried forward 10 years, and can be used to offset any other FUTURE regular taxes you may owe in the U.S., including income taxes and taxes on capital gains/dividends/interest. This is a great nuance of the US tax code very few are aware of. There are indeed parts of the tax code that will give you the feeling of “generous”. But let’s remember we all PAY our fair share of taxes, what’s fair is determined by the Government, of course.
Jeremy, I wrote a simple comment to add to the discussion but the above comment was written before reading all the other comments below, especially name-calling, vitriolic, patriotism-questioning jabs below. I never thought PF blogs are this exciting (for name-calling fun, I browse Yahoo Finance boards) but this is good. Let’s have Charlese in every post; we deserve a counter-view – all of us PF bloggers are getting complacent with concurring comments :-) I invite you Charlese to visit my website and share your wisdom there as well.
The 10 year carry forward feature of the foreign tax credit is definitely a sweet aspect of the tax code for expats who plan to return to the US.
“The deduction is very popular, but it benefits far fewer taxpayers than one might think. The current homeownership rate is around 62 percent, but of those homeowners, one-third do not have a mortgage. They own their homes outright, so the deduction would not apply to them.
Some homeowners, mainly middle- and lower-income families either don’t pay federal income taxes or don’t itemize, so the deduction wouldn’t apply to them either. Only about 40 million (or 22.5 percent) of the 173 million households in the U.S. benefit from the mortgage interest deduction, according to the Tax Policy Center.”
http://www.cnbc.com/2016/12/01/heads-up-homeowners-mortgage-interest-deduction-on-trumps-chopping-block.html
How many does that leave who could but do not?
It used to be accessible to a wider portion of the population, but with interest rates at historical lows it requires mortgages in the $1M+ range. So it is basically a tax break to the wealthy. NYC and SF (and the DC area where the Senators live) get their mortgages subsidized by the rest of the country.
In my municipality, there is a property tax exemption on the first $150,000 value of your home if you are older than 60 years. That is a local advantage for seniors who have paid off their mortgages and no longer get a federal tax break. I am sure there are hundreds of similar exemptions across the US.
“Here’s a quick rule of thumb: Compare your mortgage interest (plus any points paid on the purchase of your residence) with your standard deduction. If you have refinanced your mortgage, points on the refinancing are deducted gradually over the life of the loan—1/30th a year on a 30-year mortgage, for example. Don’t forget to add each year’s share to your deductions. For more information, consult IRS Publication 936: Home Mortgage Interest Deduction.
If the interest you paid on your mortgage is larger than your standard tax deduction, you definitely benefit by itemizing — and all the rest of your deductible expenses (including real estate taxes, state and local income taxes, and charitable donations) are frosting on the cake.”
https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/Tax-Deduction-Wisdom—Should-You-Itemize-/INF12061.html
With mortgage interest rate of, say, 4% (=4/100 =0.04):
standard deductions; mortgage principal where interest equals standard deduction:
. single taxpayers – $6,300; $6,300 / 0.04 = $157,500
. married taxpayers filing a joint return – $12,600; $12,600 / 0.04 = $315,000
. head of household taxpayers – $9,300; $9,300 / 0.04 = $232,500
(The median home value in the United States is $192,500. http://www.zillow.com/home-values/)
Is my understanding faulty or is the mortgage interest deduction applicable to many more mortgagors than those with “mortgages in the $1M+ range”?
You are assuming an interest only mortgage and looking only at the first year.
An amortization mortgage 4% / 30 years / 20% down payment would put home value for a married couple filing jointly at about $400k before 1st year interest equals the standard deduction. In year 2, the standard deduction would be higher so no benefit.
But as a country… who gets the most benefit in absolute dollars? If a $450k home purchase (2x the nations’s median home price) saves $250 per year in federal taxes at 15% marginal rate but a $1 million mortgage saves $6k at a 33% rate, 90% of the cost to the country goes to the rich.
Ta, can not see “about $400k before 1st year interest equals the standard deduction” unless =$12,600 / 0.04 / (1 – 0.2) = $393,750 which seems odd to me. Regarding “$1M+”, you may have been thinking of: “Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately).”
USA tax deductibility of large amounts of mortgage interest seems to be offset by capital gains on more valuable houses.
“Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive.”
In Australia personal housing mortgage interest is not deductible but the capital gains are not taxable.
About 30% of the mortgage payment in year 1 is principle and is not deductible. See spreadsheet.
For $1M+… if a married couple buys a big house in Kansas and saves $250 a year… sure, they benefit from the deduction. But not as much as the couple in NYC, SF, or DC. Net net, this is a subsidy on expensive houses.
Interesting comparison to Australia.
Your $400k = value of home, less 20% ~= my ~$320k = mortgage principal. Mortgage interest @ 4% = $12,800. Standard deduction = $12,600.
Recent data is lacking but the distribution of USA houses shows ~25% are valued over $400k.
Can not find the distribution of mortgage principal outstanding.My guess is 50% of mortgages on houses valued more than $400k have mortgages in excess of $320k.
25% * 50* ~= 12% of households could claim interest in excess of standard deduction.
To avoid paying capital gains tax, couples would live in a home for two years then move before the gain exceeded $500k. Rinse and repeat. No?
Where would these 12% of homes be physically located?
You could rinse & repeat home sales, and some do. You just have to pay the transaction costs, which can be 10% on the sale and 3%+/- on the purchase.
Where houses are located (see graph):
Charting The Exponential Distribution Of Home Prices In The US By Market Area:
http://www.zerohedge.com/article/charting-exponential-distribution-home-prices-us-market-area
I have missed something: ‘Only about 40 million (or 22.5 percent) of the 173 million households in the U.S. benefit from the mortgage interest deduction, according to the Tax Policy Center.’ compared to ‘25% * 50* ~= 12% of households could claim interest in excess of standard deduction.’
Who benefits from tax subsidies for home ownership?
http://www.taxpolicycenter.org/taxvox/who-benefits-tax-subsidies-home-ownership
Good charts, thanks. It looks like most of the top cities are in NY and SF Bay area (+ LA.)
Given you don’t live in the US, it makes sense to not pay much if any US taxes right?The foreign tax exclusion of ~$96,000 in income seems reasonable.
Do you pay taxes to any other country?
This only refers to the earned income and there are many issues with this exclusion. If you make a decent amount of money, you will be double taxed forever. US is the only country in the universe which taxes non resident citizens. Sort of penalising US citizens for settling abroad.
You won’t be double taxed. You’ll be taxed at the higher effective tax rate.
Of course you are double taxed. If you live in UK or Japan and utilise the deferral compensation techniques (same as 401k, for example), US still taxes you on these amounts (only because you have US passport). This is one of just many examples.
That is single taxation.
We don’t pay taxes to any other country.
We also don’t use the foreign earned income exclusion. The nature and amount of our income is about the sweet spot in the US tax code.
Once you live in a foreign country for 180+ days, you become a tax resident in most countries and US tax advantaged accounts may not be tax advantaged in these countries :)
Wow, no taxes to any country? That’s amazing. I think I’m going to be paying over $60,000 in Federal income taxes and another $60,000+ in California state income and property taxes again. Your post makes me feel like a fool for contributing so much each year to America.
Why do you think Americans are willing to pay so much in tax and not just follow your strategy? I’ve tried, but I just can’t seem to make it work w/ my income.
Samurai, I follow your blog sometimes. His strategies will not work with your income.
That’s only a 10% range effective federal tax rate?
The bigger question is why are you willing to pay $5k/month just so you can occasionally get some free shrimp at a tech company open house? SF sucks bro
You failed to address “Elated” crowd. If anything, you’ve only increased our fervor ;-).
There is no addressing the elated crowd.
Edit: It is worth noting that Ayn Rand wrote works of fiction.
Elated crowd checking in, touche about Rand. Been lurking for awhile, some really good stuff here.
US tax system is the most unfair system in the world, particularly for the US citizens who chose to permanently live abroad. US is the only country in the universe which penalises its citizens for living abroad – taxing them forever and requiring to disclose all personal information, which is not even disclosed by the residents. Citizenship-based taxation does not allow non resident citizens to have normal lives in other countries. It is also illegal taxation without representation.
Please read how 9M US citizens abroad are affected by the most unfair tax system before posting such articles.
I appreciate your offer for editorial oversight, but I’m afraid I have to decline.
My understanding of all of these points you’ve raised is different than yours, and I’m one of those US citizens abroad.
Why don’t you simply renounce your citizenship?
I am just highlighting some inaccurate facts in your article. There are millions of US citizens who have been living outside the US for decades, yet they still have to file, pay taxes to the US without even stepping their foot on the US soil. How generous is it?
Actually, I am (and thousands of others) are in the process of renouncing the citizenship as the US government is the biggest threat to the US citizens abroad. Try opening a bank account now in a country like UK or Switzerland with Obama’s FATCA in full effect! Try investing outside the US! There are many issues.
Just one example:
US citizen is living (10yrs) and working in Dubai with income USD 200,000. Try to find fairness and generosity of the US tax code in this simple example :)
Dubai has $0 Taxes. As an expat you get to NOT pay taxes on about $96k… Why are you still complaining?
Thanks for sharing.
It only takes about 2 weeks to renounce your citizenship. What is the hold up?
It is not as easy as you think if you have significant assets outside the US. Plus there is a fee of almost USD 2500 per person to renounce.
So you make 200k and can’t afford to pay 2,500. Love how some people just have excuses. If you don’t find the system fair, do something about it, like our friend Curry
I was confused too, but I think this was meant to be a hypothetical. Why else would you be trying to open bank accounts in the UK and Switzerland, all while making $200k in Dubai and working on renouncing citizenship (along with thousands of others) yet can’t come up with $2,500?
This was just an example. US citizens have significant problems opening bank accounts in other countries due to FATCA. I know many cases when people who lived in foreign countries for many years were asked by their banks to close bank accounts for being US people.
In case of Dubai. If you earned USD 200k, income not excluded by FEIE will be taxed at the highest possible rate due to the stacking rule.
If you have significant assets (earned abroad, with no US source), you still need to pay exit tax to the US government. It is very complicated.
Don’t know how long it takes, but choosing to become a stranger in your homeland, where your friends and family live, is probably not that easy to do. Plus, I understand that there is an exit tax if you have a lot of assets. This now also applies to people who have had a green card for a while, without being citizens. I think the way you are handling taxes is a far better way to go. But of course, you became FI first and are traveling overseas, not really earning an income overseas. FATCA does not affect you as a tourist, but for people truly living and conducting business in another country, FATCA is a huge headache. But good for you to set it up the way you did! I love reading those stories.
There is an exit tax if you have more than $2 million in assets.
These are all reasonable and valid points to consider for renouncing citizenship. Since Charlese said she was in process of renouncing citizenship “because the US government is the biggest threat to US citizens abroad”, I was just curious why this wouldn’t be the number 1 priority.
It is No 1 priority as I lived outside the US for many years and all assets/income have no US source. However, renunciation is not very easy – it is an expensive exercise for people who have assets/investments. Sorry – I am not complaining. Just noting that the tax code is not generous to everyone as you point in your article :)
Can you give us an idea of your:
1) Income overseas
2) Effective tax rate
3) Assets/net worth?
I’m not quite getting where you are coming from without more specific details.
Do you know a scenario where an American who makes let’s say $500,000 a year can not pay taxes by living abroad?
Thanks for any insights.
Sam
Due to FATCA I am careful not to have any USA based accounts, investments or income or dealings with USA based financial institutions despite there being a double taxation agreement between Australia and USA.
Sam,
I am not prepared to disclose my financial situation online. However, I know many US citizens living and working abroad for many years, who have absolutely no connection to the US (they have foreign spouses, houses abroad, kids born and raised abroad), except their passports, but who still end up paying tens of thousands $$$ just because they have US passport. US is the only country in the world which has citizenship based taxation (ok, Erithrea in Africa is another one). Yes, there are certain exclusions (such as FEIE of about USD 100,000) , tax credits (to offset foreign taxes), etc, but people still end up double taxed and US citizens are worse off than anyone in foreign countries due to the IRS.
One can offset ca. USD 100,000-150,000 of FOREIGN EARNED INCOME, but if you make, say USD 250,000 per year in a country with lower taxes than the US, you will pay IRS. Moreover, you will not be able to take advantage of mortgage deduction, tax advantaged accounts, and will end up paying at the high tax bracket due to the stacking rule.
OK, it’s interesting, b/c I have a decent amount of income online. So I’m assuming of I write a post in Cambodia, I can say I earned it in Cambodia right?
It seems to me that the income cap is really around $100,000 to maybe up to $150,000 max where one can figure methods to not pay taxes. After that, it seems like game over.
I have consulted with plenty of people, done my own taxes for past 15 years, and read a ton of research, and it seems difficult to not pay any taxes unless you have some mega business loss like Trump. Then, who cars about not paying taxes because you lost money.
Sam
Basically, you can have ca. USD 100-150K of tax free income. You can use the FEIE and deduct some housing expenses (depending on which city you settle). However, in order to use FEIE, you need to have either bona fide residence or to stay outside the US for 330 days. The US tax code helps US expats who are sent by their companies on temporary assignments for several years, but it hugely discriminates those who decide to settle abroad for many years or permanently.
Oh man, what a way to wake up this morning! That was a true pleasure to read. Of course, all the haters take their deductions amen credits. We should also be able to enjoy the same benefits. Keep doing what you’re doing, with the blog and your taxes :) Haters are gonna hate.
Mrs. Mad Money Monster
Good morning :)
I hope you get responses! This is absolutely hilarious!
I’ve probably only ever paid the IRS extra out of ignorance. And I’m not proud of it!
I’ve definitely paid extra tax out of ignorance. I still learn something new every year.
Just the right amount of snark. Love this post :)
On the other hand though I’m a Brit, but I talk to a lot of Americans here in Japan and I think I agree with Charlese above.
It’s one thing to be financially independent with money accounts in the US and not paying taxes in other countries, and another to be living and working in Japan, unable to use Japanese financial products thanks to FATCA and FBAR and shut out of US accounts because Japan doesn’t recognise them as tax-exempt either.
The US and Japanese tax systems aren’t designed to work with each other at the same time. Very glad to be British and feel sorry for my American friends in this situation.
I think it might help if there was an income cutoff for FATCA and FBAR, so that low- and medium-income earners are not caught up in the red tape.
-and it’s not just the US. China and Eritrea also tax their non-resident citizens ;)
Thanks Sendaiben
There are some nuggets of truth in Charlese’ comments, but they are written like the talking points off a conspiracy website. And of course it misses some important points (some you mention) in favor of sensationalism… if you can vote, you don’t have taxation without representation. All together it just raises the troll flag.
If you like, we can put a caveat on the title of this post (no trolling required):
Something for Everybody (except US citizens who work abroad in countries that have lower tax rates than the US and make more than $100k/year, and/or want to open local banking/investment accounts.)
I lived and worked in Taiwan prior to FATCA and FBAR, although I never bothered to open a local bank account. I just had my Switzerland based employer direct deposit funds to my US bank account.
Working abroad made me ineligible for tax-deferred accounts (such as the 401k) and required filing tax documents in both countries. Since Taiwan has higher marginal tax rates than the US, and without tax deferred accounts, I had the privilege of paying more tax. This isn’t the fault of the US… the only thing was some extra filing hassle. But fun fact… that extra tax gave me a carry forward tax credit when I returned to the US… so maybe something for everybody after all.
China does not
I see nothing wrong with taking advantage of the tax code. I do find the code itself reprehensible. The code favors the self employed and the wealthy that have a choice on how to receive their income in the most tax exempt method. It attempts to incentivize certain behaviors in some sort of Rube Goldberg type of structure that fails at its goals. None of that’s your fault though. Your just some guy on the internet sharing cool tax tips. Keep up the good work.
This is probably my favorite description of the US tax code of all time. Very nice.
It’s impossible to be everything to everybody and still actually be good at anything. The compliance cost is much too high, and it definitely has major components of social engineering. Looks like more of the same for the foreseeable future.
Love it. The arguments about being a scumbag for not paying income taxes forget that we pay income taxes in multiple ways. We earn it, we pay income taxes. We use the money we earn to invest, we pay taxes again on those gains. We spend money we pay taxes. We pay taxes on phones, food, utilities, literally every dollar we spend that we already paid taxes when we earned! It’s insane.
Everyone has the same opportunity to reduce their income and lower taxes. There is nothing crazy about utilizing tax advantaged accounts and tax deductions put in place to help all Americans.
But It’s also easier to come after a blogger than to go after the corporations opening shell companies abroad and selling themselves their own intellectual property to move their profits offshore avoiding taxes.
This is very true. If you own an iPhone you’re definitely supporting this behavior as well ;)
Anyone who feels like they are not paying enough taxes are free to gift money to the US Government to reduce the public debt. I do not think your gift is tax-deductible. (though you wouldn’t want to deduct it anyway)
There are two ways for you to make a contribution to reduce the debt:
At Pay.gov, you can contribute online by credit card, debit card, PayPal, checking account, or savings account.
You can write a check payable to the Bureau of the Fiscal Service, and, in the memo section, notate that it’s a gift to reduce the debt held by the public. Mail your check to:
Attn Dept G
Bureau of the Fiscal Service
P. O. Box 2188
Parkersburg, WV 26106-2188
If you decide to give, please post here! ;-)
Great article; I’m in complete agreement about your right to legally use the tax code as it’s written, just like everyone else does. Your insights and tips are very much appreciated by most of the FI community.
But yeah, the expat tax thing is a very different experience for people who don’t have any access to US accounts and products, such as my British friend’s son who was born in the US but left as a baby. To hold any simple UK index tracking mutual funds to invest for his retirement, he’d have to file PFIC forms which even the IRS admit cost 45 man hours to compile, by people trained to do so. Individual shares are ‘allowed’ providing he can even get a UK brokerage to open an account for a ‘toxic’ US citizen. Also, his UK employment pension contributions aren’t tax-deferred in the eyes of the US, and the employer contribution share of that counts as his income for US tax purposes.
Now, he can always renounce his citizenship, providing he’s up to date on all the above tax filing for the country he lived in for a few months as a baby, and has a spare $2.5k. But that’s often not an option for US citizens who move overseas as adults, who may have to live in their new country for more than a decade before becoming eligible for a new citizenship to enable them to renounce the old one. In the meantime, they struggle to open bank accounts or get mortgages, have almost no tax-advantaged way of saving for retirement, etc. Being a US citizen trying to actually live and work overseas, rather than merely travel, means you can’t have a normal life.
This is a great response to all those haters who rage at you for minimizing your tax burden. Taxes are convoluted. That’s why most people don’t even realize that they get a tax benefit on something. You see people complaining about handouts for example, and then they’ll take their mortgage deduction, which, if you think about it, is a handout for home owners.
It is exactly a handout. Homeowners in NYC, SF, and DC get their mortgages subsidized by the rest of the country.
Man, I hope those subsidies never go away!
Now if only I had bought Manhattan property in 2000 when I wanted too. That woulda been a 300% appreciation plus 17 years of subsidies! Dohhhhh.
Fantastic response! Thank you
Ha Jeremy, love your ever-slightly sarcastic tone in this article. :D
Interesting discussions on here so far. US isn’t the only country that forces its citizens to pay oversea income too, Canada has the exact same rule. Taxes are convoluted and many people unfortunately don’t realize all the benefits they are receiving. Holding a US/Canada passport is one reason to pay for some level of income tax as you’re contribute to the greater being of the country. If you really hate paying taxes when you’re living abroad, perhaps renounce your citizenship is the way to go.
Canada (like many countries) presumably requires its citizens and residents to pay tax on any income they have coming in from overseas. If a Canadian moves to, say, France, their tax obligation to Canada ceases until they move back. It’s not the same situation.
Out of interest, please list ‘all the benefits’ my friend’s son is receiving from his US citizenship by being accidentally born in the US but not having lived there since he was a few months old, compared to not being able to open bank accounts or hold normal, everyday investments, or save in a tax-deferred for retirement, in his country of residence and other citizenship?
Automatic birthplace citizenship combined with citizenship-based taxation is a horridly inadvertent trap for many people through no fault of their own.
Your understanding isn’t quite correct. If you are a Canadian resident for tax purposes (http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html), yes, you are required to report and pay taxes on your worldwide income. This is to prevent residents from sheltering income from taxes by earning it in a different country. However, if you cease to be a Canadian resident for tax purposes (note that this has nothing to do with permanent residency or citizenship status), you no longer have Canadian income tax obligations. As far as I am aware, the United States is the only country that requires its citizens to file a tax return and (potentially) pay taxes regardless of whether or not they are actually living (or have ever lived) in the country. It’s an interesting quirk of the U.S. tax system.
They casually forget that you’ve actually paid your taxes on a large pile of cash and assets that you earned while trading time for money.
This is true, I paid taxes while working. The beef usually comes because people think capital gains and dividends should be taxed. And because they are largely uninformed about the tax code.
Great article!
I definitely agree that the US Tax System is very generous to everyone. The only problem is that people are usually unwilling to take advantage of what is being offered to them, are unable to, or are just simply uninformed about it.
In the same way, the same logic can be applied to people like us who are able to save a lot of money. There will be haters who will comment about us not enjoying life to the fullest, how money will be able to make us happy, etc.
I have no problem with trying to minimize your tax burden (which I do), but I’ve also never complained about having to pay taxes. I have benefited so much at the expense of the taxpayers that I don’t mind contributing my share.
I never complained about the taxes we paid while working either. I did pay the minimum I was legally required, which was a healthy sum.
I think these three sentences are contradictory themselves.
“The US tax system is convoluted, obtuse, contradictory, and expensive… yes, all of those things.
It’s also ridiculously generous. To everybody.”
If it’s “convoluted” (agree), contradictory (agree), it is necessarily going to be expensive (also agree). So for that, it can’t really be generous. For something that is taking property away from people and then they allow you to keep certain parts of what they claim you “owe” for certain “deductions”, I can’t really claim that is “generous”. If the system was reduced to be less complicated, contradictory, and obtuse, it would be less expensive. Just like in a business, that expense could be (but probably wouldn’t be) passed on to the end consumer (taxpayer) in the form of a tax break for everyone. So instead of “claiming” deductions, you would just file your taxes, pay your “X%” with no deductions, and move on. Then instead of paying (just throwing numbers out) 25%, one might only have to pay 15% since the IRS would no longer be needed in the quantity it is now and those cost savings could be passed on to us.
Anyway, I’m in no way arguing with you about the overall premise of the post, I’m just stating that it’s hard for something that is unnecessarily convoluted and expensive to actually be generous. I prefer more of a usage based taxation system. (not that I will ever get my wish) I prefer tolls to gas/property taxes, because it allows for the funds to be used on the roads they are needed (just as an example).
I also feel you are perfectly within your rights to “game” the tax system since you aren’t doing anything “illegal”. You are just using it as it is written. It’s up to the government to change the “rules” if they really want to prevent that. Not that I feel it is right to tax money you have already earned and put to work for a second time. (Just my opinion, though)
Thanks for the post, as always.
Congratulations on your tax and financial knowledge. Unfortunately, somewhere along the way, it seems the so called ‘well to do’ people became a group to be disliked and not trusted instead of admired. We too travel the world with no physical home, but not with your pazaz. Good luck to you and your family.
Living the dream, Harold. Congrats! And thank you.
I think the best thing about this post is Charlese. I recommend that you have some Charlese in every post. Maybe a retainer is in order.
…passion alone probably just leads to ignored and deleted comments… :)
I concur…after reading these comments I pretty much forgot all about what the post is about…this is all too good! I really wish I could post the Michael Jackson eating popcorn meme but, alas, I can not.
PS – we all need a bit more Harold Hall in our lives.
I concur.
High income earners pay a lot of taxes. Charlese does, Jeremy surely did, I currently do. Charlese is also welcome to do the same as we all try to do in the FIRE community: save a lot of her $200k income and retire in a few years using the same tax laws as the rest of us.
That being said: I would also endorse getting rid of the FIRE loophole, where people can generate about $100k in tax-free annual income: around $25k of ordinary income (fill up standard deduction plus exemptions) and then around $75k in long-term capital gains and dividends by filling up the first two federal tax brackets. The zero tax on capital income in that range was intended for middle-class mom and pop investors, not the multi-millionaire early retirees. Lower the ordinary income rate to 12% (from 15%) and increase the capital income rate to 6% (from 0) as is currently floating around in Congress and most middle-class households would benefit (even some early retirees, depending on the composition of capital vs. ordinary income). And (almost) everyone will pay at least some small tax bill, however symbolic it may be. And the GCC can afford that, too, I’m sure. ;)
The advantage of having everyone involved in paying taxes is that there is more incentive from the voters to demand sensible spending. Demand the same frugality from Washington D.C. that we’re practicing in our own households.
There is a big difference. I do not live in the US, I do not have any connection to the US, I do not use any of the infrastructure, I do not intend to return and if I need any service from the US (like a new passport), I pay cash to the US; yet, I still need to file and pay :)
Don’t get me wrong: I am totally opposed to the double-taxation. It creates all sorts of inefficiencies. Especially on the corporate level (foreign earnings just sit around abroad, can’t be repatriated).
But then again: as an American citizen you may not use the services right now, but the option to use them in the future is of some value. Simple principle from option math: even out of the money options are valuable.
Think about it this way: If something goes wrong in the country where you reside right now (Middle-East, you said?), I’m sure you’d be the first knocking at the U.S.embassy door and requesting a helicopter ride out to safety, right? :)
No way, Charlese would decline the helicopter ride. Right?
But also… this isn’t double taxation. No dollar is taxed two times.
Hey ERN, is there a source for this:
“The zero tax on capital income in that range was intended for middle-class mom and pop investors, not the multi-millionaire early retirees.”
For education purposes.
Thanks
“Hey ERN, is there a source for this:”
I was hoping to find a better quote, but after 5 minutes of google I found this:
“The capital gains tax has been described as a tax on the American dream. For many low- and moderate-income workers, one of the few ways of accumulating wealth is through investment in stocks and businesses. […] High capital gains taxes reduce opportunities for workers to achieve the American dream” Source: https://object.cato.org/sites/cato.org/files/pubs/pdf/pa242.pdf page 17
It’s not the quote I was looking for. Because after the reduction of the Cap Gains tax down to zero I distinctly remember some political talking heads on TV mentioning that this will help working families to participate in capital markets and that the zero rate was constructed exactly for that purpose.
But I’m pretty sure that if there’s any discussion about raising the cap gains tax to 6% again (in exchange for lowering the ordinary income tax rate), we will hear some sob stories about how orphans and widows will suffer. :) Stay tuned!
Cheers. And congrats o a very fun read, both the post and the discussion!
Careful Jeremy, all this tax avoidance braggadocio will come back to haunt you if and when you run for president.
This used to be unprecidential
Too good. Too good. I think the tax/subsidy whiners are the WORST and most annoying thing I have to deal with in the world of blogging. Are they clueless or are they blind when it comes to all the subsidies and government handouts they receive (on top of all the passive public goods like clean air, water, and paved roads)?
I also get the “god you’re a horrible evil human being because you take subsidies for health insurance. I’d be ashamed if I was able to pay for it myself and voluntarily signed up for welfare like that”. When in reality the ACA provides a tax credit, and pretty much everyone would scream bloody murder if their Medicare was taken away. What the hell is wrong with people that they can’t see that one benefit is just like the other benefit, it’s just a matter of how much you pay for it (or if you’re very high income/wealthy you might receive less of a benefit or none at all at some point).
Frustrating. What can you do but move past it, live life, and write scathing blog posts as rebuttals? :)
To be fair, you are a horrible evil human being. Welcome to the club :)
I also like how people would be ashamed for doing something they think you shouldn’t do, but they are never ashamed for being judgmental assholes :)
You are both deplorables… bad hombres if you will. But I love you anyways.
I’ll start out by admitting I am a conservative both politically and fiscally, who happens to have bat-shyte crazy liberals for siblings. During the recent election cycle one snarkily asked me what I felt was the additional tax burden I would consider to be a “fair share” that I should be required to pay. I assume this was to solve all the world’s ills, ranging from curing cancer to world peace to insuring all the puppies in the world have loving homes. When I answered nothing you can imagine the response from this self-righteous Leftist. It did not matter that for decades I lived in a tax hellhole called New York before escaping to the South six years ago. Nothing is ever good enough for such people.
Of course he is retired and collecting SS, his medical needs are covered by Medicare, and his Federal tax rate is zero. When I asked if he was sending voluntary contributions to the Treasury to cover his “fair share”, well, let’s just say I must have been talking crazy talk. Critics of those playing the tax system game have never looked in the mirror; I guess they feel their task on earth is to point the finger at others. Keep up the good work on legally avoiding taxes, my friend. I am right there with you.
I feel like “tax avoidance” is the wrong word and conveys the wrong message about what is being done. It should really be called “overpayment avoidance”, because that is actually what it is. Just my 0.02
Tax avoidance is the proper phrase.
By definition: Lawful minimization of tax liability through sound financial planning techniques
It may be the proper term by definition, but it seems like it’s routinely used to describe people who use nefarious means to avoid taxes. There is nothing you do that isn’t legal. You’re not wrong, I just don’t like the phrase.
Well, you can’t blame people who:
* Like to raise taxes on others if they don’t have to pay more taxes themselves
* Like to judge others for not paying more taxes when they aren’t paying any themselves
It’s just human nature to want to take, instead of give.
I’ve been thinking for the past 5 years after leaving corporate America in 2012 that an honorable amount of income taxes to pay the government each year is about $50,000 per household. It’s more than what a typical household comes, but not so much so that it disincentivizes one from working hard.
But after reading this article and others, I’m thinking of no longer paying taxes.
Sam
I have friends of all political tendencies and value choices. We all have a lot more in common than areas of difference. It is interesting today how labeling peoples political choices is a tool for combat and argument… as such, I tend to avoid labels like liberal and conservative / right and left, and instead just say people
Anyhoo… if we all had a tax burden of zero, what would that world look like, you think?
Thanks ChuckY
Haha. Awesome response. Go Curry Craker!
Wow the comments!
All I know is that I’m currently paying a whole lot of taxes. But – I pretty certain with some lifestyle changes, and from learning more about the system (thanks GCC) I can fix this!
The comments definitely went a little sideways…
Ha! Jus a lil ?
Great post!
I came to a similar conclusion when responding to a friend who said it was unethical for us to accept the large subsidy we will get from the Affordable Care Act. We all take everything we can legally get from the government, and to do otherwise would be quite silly.
The definition of unethical: “Hey, I get tax free health insurance from my employer but no way should you also get some tax benefit on your health insurance”
Wait, do people not understand that the cash you put into investments is AFTER TAX money? So why should you pay tax on something you’ve ALREADY been taxed on? That’s why the dividend tax credit is there to prevent double taxation.
Also, if they want people to stop “tax avoidance” then why did they elect a tax cheat? Ask Trump how much he’s paid in taxes over the years? If the president-elect doesn’t pay taxes, why should you? And, not only that, you are nomadic and are currently in Taiwan. So you’re not even USING the services in the States anyway.
On the plus side, feelings seem to trump facts these days. And apparently not paying tax gets you elected, so clearly you should run for president in 2020! Go President CurryCracker!
There is no dividend tax credit in the US.
Same goes for future US elections ;)
Yours is actually better, since it’s not a dividend tax credit but a reduced tax bracket for dividends to prevent double taxation.
Well if US elections disappear, you can always move to Canada! Our PM is a dreamboat you know.
Australia, and New Zealand, have dividend tax credits. Works thus: Company profit $100. Company tax $30. Company dividend paid $70. Individual dividend received $70. Individual taxable on “grossed up” dividend $70 * (100 / (100 – 30)) = $100. Individual tax credit $30. In other words, tax paid by company is claimable by individual receiving dividends; individual pays tax on their income including their “grossed up” dividends.
This bickering reminds me a lot about a professor I had in grad school who was complaining about income inequality. He was making $350k at the time and I was making $30k. When I suggested that he could simply transfer some money to me, thereby lowering inequality by lowering his income and increasing mine, he scoffed. People like this are all talk, but when presented with the opportunity to solve the problem they’re griping about, they do nothing. As others have mentioned, we all have the ability to pay more in taxes than we do, but nobody willingly does it.
I’m all for repealing this mess of a tax code that we inherited. But until then, let the strategic loopholes continue!
I find that reading your blog produces the highest return (in terms of $ increase in wealth) out of any activity I do. Keep up the good work. Curious to hear the details of our previously-alluded-to offshore self-employment recommendation.
Yeah, the easy answer to inequality is mimic the Nordic countries. They could easily turn that $350k income into less than $100k after-tax.
Thank you for your very kind comment. The offshore guest post is coming soon.
As a Canadian Beijinger…we are non resident…so no Canadian taxes… Chinese taxes have a lot of options for deductions such as rent, child education costs.. even swimming lessons…..tax refunds when you leave etc God Bless.:)
I paid a ton of tax when I was working full time. We’re paying a lot less now that I don’t make as much income, but Mrs. RB40 still works. Once she retires, then we will enjoy paying little to no taxes. Hey, we paid our due already.
Don’t let the jealous folks get you done. You worked hard and saved hard for your money and if you are positioning yourself not to pay taxes then that’s your right as an american.
This reminds me of a conversation I had with a couple friends. They were preaching about how great a flat tax would be until I mentioned that would mean their mortgage interest is no longer deductible. Then they decided a flat tax wouldn’t be so great after all.
Everyone wants “fairness” until a tax benefit they use is taken away!
Nothing is wrong with the “benefit” being taken away, when it really never was a “benefit” to begin with. See my post above. If you make the entire system less complicated and expensive, we ultimately *should* bring home more in pay every week.
A flat tax? May as well legalize ALL theft both by citizen and state.
Huh? Lots of states have a single rate tax, or even no income tax at all. I would prefer to see a 15-20% universal sales tax over any kind of income based taxation. Combined with usage fees locally, like tolls, I feel would result in a much more efficient tax system. Income taxes take away choice. Sales taxes are all based on free will and choice. Then, you take in tax money from people who don’t participate in the above ground economy.
I agree with the sales tax bit but the others have got to go. Taxation is Theft.
If taxation is theft, why is sales tax not theft ?
Why are fees not theft ? Surely you are not so naive to think that a government fee actually pays for the service given LOL
Sales tax involves choice. Income tax does not. You can choose not to spend money, you can’t do without income. I can’t speak for the OP, just this is why I am more of an advocate of sales tax and usage fees (tolls, etc.).
True enough. But at least I can CHOOSE to pay for sales tax and fee. Sales tax, tolls, and fee don’t just get magically yanked out of my paycheck every week, so I’m alright with those.
This is from a Canadian ….. Toronto and now California .. vlog … not really on Taxes …. but you may enjoy it …. and it is useful …. I think to picture where you are on the journey …. and maybe where you want to go …. ‘The 6 stages of financial independence …” … I would say we are in stage 5 … but keep working because we are in Beijing …. https://www.youtube.com/watch?v=dnQpGYuq0cg
God Bless, Beijing
I’m surprised that, given what you stand for, you’d throw SF and NYers under the bus for hoarding all the mortgage interest deductions. You noted that “Since every How Much House Can You Afford calculator includes estimates for a tax benefit, the result is just higher housing prices.” The same logic applies to dinky apartments and gigantic mansions all the same. Isn’t it hypocrisy that you own a blog on minimizing your own taxes, while claiming that “People in SF and NYC get their mortgages subsidized by the rest of the country”?
I’m not principally opposed to the claim that people owning more expensive houses get relatively outsized benefits from the mortgage interest deduction. I just don’t understand how you decided to frame these people as rather unfairly ripping off the other home owners – in a way not unlike how those commenters demonized you. Especially considering your conclusion on rent vs. buy, it would seem that those who buy more expensive homes (also subject to higher property taxes, maintenance costs, and transactional costs) lose out more despite the larger tax write off.
You’ve reached the wrong conclusion.
It seems obvious that even though you no taxes now, you did pay taxes while you were working for X number of years and heavily saving (and probably a non-trivial amount). I’m not an advocate of measuring societal contribution in taxes paid, but if someone is going to have that mentality a more logical metric would be cumulative taxes paid versus taxes paid in any given period of time.
Just my 2 cents
It does seem obvious, doesn’t it? In the past when I’ve mentioned this to the complainers, it has been met with a response like, “Yeah, but you can afford it! Whaahhhahahahhhh.” So now I’ve settled on the approach outlined in this post :)
Nice article. I admit to being jealous of the tax flexibility that early retirees have. My wife and I are still working and have a high salary. Obviously a good problem to have but the amount of tax we pay is a bit crazy. I’m looking forward to my income dropping significantly when I retire so I can make several investment moves that would be too costly to make while I’m in a high tax bracket. The whole system is set up in a strange way but I’m happy it’s helping encourage me to retire early :)
Trolls gonna Troll. Yeah if you can find a way to stash more and pay less taxes, why not the super rich do it.(How you think they got to be super rich) Those people who talk like that don’t have a savvy accountant. Well good luck not paying taxes in 2017. Can you do a post about how you handle money transactions in international destinations with the least amount of fees? Talk to you soon
Sure.
Nice article, Jeremy. I see absolutely nothing wrong with your approach to minimizing tax. Doesn’t everybody try to minimize their tax bills regardless of their retirement status? I wouldn’t even call them loopholes. You simply moved from the employee class to the investor class, and therefore get to enjoy the tax benefits offered to investors. If the haters are in a position to do what you do, no doubt they would all do it themselves.
Please keep up the good work! I really enjoy your articles.
Quite a bit of strong reactions there but I guess if you are getting haters that means you are doing something right with your blog.
Thanks for meeting up the other week, great to meet you in person.
Enjoyed this post
Kyle Rolek CFP®
a couple of big items you did not mention: the standard deduction and deductions for exemptions (both can be zeroed for high income people); tax free compensation in the form of medical insurance and other benefits.
also I am not sure how retirees “get low dividend and capital gain taxes” that are not available to everyone? however I do understand these items are taxed at different rates.
it would be nice and fair if all income was taxed the same, and rates (even if progressive) dropped substantially. but for that to happen our government would have to give up some of the control they have over us average citizens. it will never happen.
Lovely post.
I’m reminded of the internet discussions trying to define ‘rich.’
It usually ends up being “they make more money than me.”
I get the impression that Curry Cracker has a lot to teach me. Time to subscribe
I end up not paying federal taxes, about $500 – $1000 in state taxes, completely offset my health insurance with tax credits, and pay about $5000 a year in SS/Medicare. This is on about $200k a year business income after expenses.
Self-employment and a moderate cost lifestyle of < $30k are two of the three linchpins of my ability to put the rest into tax advantaged retirement accounts.
The 3rd, and less discussed and appreciated linchpin of my low tax life is to invest in my health with a healthy lifestyle. I get to work for more years at a leisurely pace and can avoid expensive health insurance/costs.
Don’t we all love optimization? Even the angry guy likes it, who knows, maybe he’s just mad because you are smarter than him. I would love to hear from some CPA’s that what you are doing is even close to illegal, that will never happen. Out of the 7+ billion people on this planet, some of them are not going to like what you are doing, and that’s ok, you keep doing you, and thanks for the inspiration and guidance on how to minimize my own tax burden. Much appreciated.
Yeah, I drop the feds a couple grand on top of what I pay in taxes every year. At the end of every year, I have all this excess cash and have no idea what to do with it. Given their track record, I figure they will put it to much better use than I ever could. You know, another nuke or pay down the national debt or something like that.
I may find myself in a situation similar to yours in a couple years. Our assets exist mainly in “taxable” and Roth accounts, so we’ll have plenty of tax-free spending money.
What many fail to recognize is that we early retirees have paid handsomely into our nation’s coffers while working. My career contributions to our local, state, and federal governments will have totaled ~ $1.8 Million when I consider taking my early leave next year. It would be difficult to argue I haven’t paid my “fair share”
Best,
-PoF
“Yeah, but you can afford it!” said the troll.
It’s definitely a different experience living at the other end of the marginal tax rates.
So why is it not ok.. if Trump does the same thing?
Right now, I don’t worry too much about how much in taxes I pay. I minimize them as much as possible, and take advantage of whatever deductions the government will legally let me take. But for the most part, the more taxes I pay, the more money I’m making. When I reach retirement, that’s a different story. With preferential tax treatment on long-term capital gains and dividends, I’ll be very focused on reducing taxes as much as possible.
Oh ho ho ho! Wow. People on the internet can be cruel. I had someone write me a vicious letter because I said I didn’t like Subarus (a letter that I mercilessly shared and laughed at with family). People get riled up about anything.
I’m nervous about our 2016 taxes since we bought a home that year. I know we can write off interest, so that’ll be nice at least, but I’m not sure what soul-sucking taxes we’ll see on our bill. Agh! I do want to work more on decreasing our taxable income through investments; that seems like the way to go.
And that doesn’t mean I don’t believe in taxes, of course. We need funds to maintain our infrastructure. But I really really don’t want to give 30% of my income to the government if I don’t have to.
I thought everyone knew that Subarus were terrible. Unless it is an Uber…
Hey, watch the Subaru bashing or I’ll have to get mad on the internet. Just kidding.
Ha! I just can’t win :)
But I feel that way about all cars, except the self-driving ones.
Regardless of anyone’s personal opinion on the blinding complexities of the United States tax code, you’d be a fool not to take advantage of whatever you can, regardless of how wealthy you are or where you live. Besides, one way to avoid the majority of taxation to begin with is to reach financial independence as early as you can, then reduce your taxable income to the point where none of it concerns you any longer. :)
I have a child in daycare, but I choose to not file for a refundable dependent care credit. What would I do with an extra $600 anyway. I would rather pay the White House mortgage over mine. ? Before people complain, the 1%ers pay almost half of the taxes in he US. They may have low rates, but half of Americans have negative tax rates (free money), including me, even though I earn a slightly higher than average income.
I think $600 is the going rate for a night in the Lincoln bedroom ;)
When factoring in ACA subsidies, I believe the number is around 60% of Americans receive more tax benefits than they pay in Federal taxes, including FICA. Similarly most of the States receive more income from DC than they send.
Always maximize in all legal ways available…why not?!
I don’t understand why some get offended when some use tricks to reduce their tax bills to a minimum. Rich or not, it’s all fair game and it’s not like you guys didn’t pay taxes back when you were working…
Great post, thanks!
I don’t see why people would be upset that you don’t pay taxes now. Your income is too low now to pay taxes. Anyone with low income doesn’t have to pay taxes. What is there to be upset about??
Some people seem to prefer life with their knickers in a bunch.
Only having read a small small fraction of your blog I thought you graduated with debt, hence the student loans that I thought you took out and took a few years paying off (Sorry, I am probably missing something here)? I guess maybe at one point in your life you were working minimum wage without taking out loans or something along those lines.
I most likely read something wrong.
Keep it up GCC!
That is correct. I graduated with about $40k of debt. It took about 6 years to pay it off.
Did you guys pay a lot of taxes while you were still working?
I opened up a SEP IRA yesterday and contributed the max I could (it’s low, only $4,600) but that saved us around $900 in taxes owed. It took me about a day to research and then 10mins to open the account since it was instant. $900 for a few hours work sounds good to me!
And even though I just realized this now I’m going to open a Solo 401k soon and begin maxing it out every year as I move cash from savings to the Solo. Is it possible to convert some of the Solo funds to a Roth and then pull those funds tax free after 5 years provided I don’t pay any taxes on the conversion?
HAHAHA. This type of writing is so my speed. I love it!