How the Average American Can Pay Zero Taxes (Legally)

When it comes to taxes, the wealthy often make headlines for leveraging strategies to minimize their tax bills. Sometimes even bringing them down to zero. But here’s a lesser-known fact: with smart planning, the average American can also significantly reduce their tax burden, potentially to nothing, without breaking the law.

Here's how you can take advantage of tax-saving strategies like deductions, credits, and smart investments.

Maximize Deductions

Deductions reduce your taxable income, meaning you owe less in taxes. While the standard deduction for 2024 is $13,850 for individuals and $27,700 for married couples filing jointly, itemizing your deductions might save you more if your expenses exceed these thresholds.

Key Deductions to Consider:

• Mortgage Interest: If you own a home, you can deduct interest paid on your mortgage.
• Charitable Contributions: Donations to qualified charities can significantly lower your taxable income.
• Medical Expenses: If your medical expenses exceed 7.5% of your adjusted gross income, you can deduct the excess.

Claim Every Available Credit

Tax credits are even more powerful than deductions because they directly reduce the amount of tax you owe.

Popular Credits for Middle-Income Households:

• Earned Income Tax Credit (EITC): Designed for low-to-moderate-income earners, this credit can be worth up to $7,430 for families with three or more children in 2024.
• Child Tax Credit: Parents can claim up to $2,000 per qualifying child under 17.
• Education Credits: The American Opportunity Credit and Lifetime Learning Credit can help offset education costs.

Leverage Retirement Accounts

Contributing to retirement accounts is one of the simplest ways to lower your taxable income while securing your financial future.

Options to Consider:

• Traditional IRA: Contributions are tax-deductible, and the money grows tax-deferred until withdrawal.
• 401(k): Contributions are deducted from your paycheck pre-tax, reducing your taxable income. For 2024, you can contribute up to $23,000 if you're under 50 and $30,000 if you're over 50.

Start a Side Hustle and Deduct Business Expenses

If you have a side gig, you’re essentially a small business owner, and that comes with a host of tax advantages.

Examples of Deductible Expenses:

• Home office costs
• Internet and phone bills
• Travel and meals related to business
• Equipment and software

By carefully tracking and claiming these expenses, you can offset your income and potentially pay zero taxes on your side hustle earnings.

Invest in Tax-Free or Tax-Advantaged Accounts

Certain investments can grow your wealth without adding to your taxable income.

Top Options:

• Health Savings Account (HSA): Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
• 529 Plans: Save for your child’s education with tax-free growth and withdrawals for qualified expenses.
• Municipal Bonds: Interest earned from these bonds is often exempt from federal and state taxes. (Article on these bonds is coming soon to our blog)

Strategically Offset Gains and Losses

If you invest in the stock market, you can use tax-loss harvesting to offset capital gains with losses. For example, if you lose money on one investment, you can use that loss to cancel out the tax owed on another investment’s gain.

Pro Tip: If your losses exceed your gains, you can deduct up to $3,000 from your taxable income and carry the excess loss into future years.

Optimize Your Filing Status

Your filing status can significantly affect your tax liability. For example, if you're single with dependents, filing as "Head of Household" offers a higher standard deduction and lower tax rates than filing as "Single."

Use Tax Software or Consult a Professional

Even with the best intentions, it’s easy to overlook valuable deductions and credits. Investing in tax software or consulting a professional can help ensure you’re maximizing your tax savings.

Final Thoughts

While it’s not always possible for everyone to pay zero taxes, these strategies can dramatically reduce your tax burden. By understanding and utilizing deductions, credits, and tax-advantaged accounts, the average American can keep more of their hard-earned money legally.

Start implementing these tips today and watch how a little planning can lead to substantial savings come tax season.