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They max out their retirement plans, maximize their write-offs, offset gains with losses and pay extra mortgage interest at the end of the year to zero out any taxable income. It's not easy to do and you generally have to make less than you would like. For some people, it's doable; for most, it's not. It helps to own a business where you can control how much you make.
for salaried W2 it is very difficult to cut a substantial amount in taxes besides the usual deductions for children, mortgage interest etc. If you have income as a consultant (1099) or as a corporation then there are all sorts of loopholes that can lead to very little taxation.
We have a rental property that keeps our effective tax rate down pretty low too. I would guess if we had more we would pay no income taxes--keep in mind it doesn't mean we don't pay ANY tax because we still pay plenty in property taxes and other taxes.
They max out their retirement plans, maximize their write-offs, offset gains with losses and pay extra mortgage interest at the end of the year to zero out any taxable income. It's not easy to do and you generally have to make less than you would like. For some people, it's doable; for most, it's not. It helps to own a business where you can control how much you make.
I own a business and since we contributed to retirement plans plus paid a lot of extra stuff last year, like state taxes and extra real estate tax, etc., I thought we'd get off easy at tax time this year. Nope. We paid $7000+ for health insurance/doctor bills/prescriptions, but we were a couple of hundred short of being able to itemize that because it has to be a certain percentage of your income and we didn't quite make it. Then they put a ceiling on the deductions you can take so all the extra stuff we paid only counted up to a point, the rest we were unable to claim, and then we got stuck with AMT (alternative minimum tax). I have come to the conclusion that you can't win. Work for cash is the only thing I can think of.
for salaried W2 it is very difficult to cut a substantial amount in taxes besides the usual deductions for children, mortgage interest etc. If you have income as a consultant (1099) or as a corporation then there are all sorts of loopholes that can lead to very little taxation.
During my work career, my stated income was from pay checks.
I would like to know too especially from someone who had to pay close to zero taxes, I always read about it and people talk about all the deductions and so on but I haven't met anyone who can actually say that his/her taxes are almost zero.
In my experience, it would be almost impossible for me to reach that point, my wife and I maximize our 401k's claim deduction for education related to work, we try to claim for medical expenses but it's almost impossible to pass the 7.5% barrier, even claim for tax preparation and tax advise, and still paid tens of thousands in federal taxes between the two of us.
I guess I have to tell my wife to give birth to octuplets to see if that will lower my taxes
Edit: I forgot to add that I also put pretax money for public transportation, an HSA and I was contributing to a ROTH IRA until I got married and passed the income limit but that's just peanuts in comparison to the amount of taxes I pay every year.
So did you not report any income from the side business activities?
Always be honest with the IRS.
Never lie to them, never hide anything.
Always report all income [and losses].
I have been audited 3 times, which is not bad for a 20 year career. 2 audits changed nothing the third audit increased our 'refund'.
I say "Refund" because it is goofy. Nothing is withheld from my take pay, nothing is paid when I file my taxes, yet when everything is done we used to get money 'back'.
Running a business activity is very common in America. Most business activities are operated at a loss. Those businesses pay employees, they collect equipment, they serve their customers. But they also lose money.
The loss gets subtracted from the owner's AGI.
There once was an IRS rule that every third year a business had to show a $1 profit. We did that a few times. Every third year a $1 profit.
Now that rule went away.
I know a comic book collector. He goes to trade shows [all deductible], he buys comic books, file cabinets, temp and humidity controlled storage, he dumps a lot of money into this activity.
It is all done with the intent of one day making a huge profit.
But the big pay-off is somewhere in the future. So each year he has massive losses.
All of these losses are subtracted from his AGI. Keeping his AGI low or near zero. He pays no income taxes.
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