Tax Resistance: A Howto Guide

How To Resist the Federal Income Tax Through the “Don’t Owe Nothin’” Method

1. Introduction
2. Is this method right for you?
3. How The DON Method works
4. Path 1: Get your income out of the “taxable income” category
5. Path 2: Use credits to eliminate your tax liability
6. Do the math!
7. Make the ad­just­ment!
8. Conclusion and Example

I. Introduction

This “howto” guide is designed to introduce you to a way to stop paying federal income tax in the United States, legally and by-​the-​book, by keeping your taxable income low and by qualifying for certain credits. I call this “The DON Method” (short for “Don’t Owe Nothin’”).

This guide is for people who are considering tax resistance but aren’t sure how to go about it. It may also be useful to people who simply want to pay less federal income tax, whatever their motives.

Why I wrote this

Here’s a brief history of how I got interested in this subject and why I thought it was important to create this guide:

In March of 2003 I decided to stop paying the federal income tax because I did not want to fund the gov­ern­ment’s activities. I decided to do this by lowering my taxable income and taking credits that reduced my tax burden to zero — what I’m calling “The DON Method.”

I was surprised to discover that I could earn quite a bit of income, and live very comfortably, without paying federal income tax and without having to go up against the IRS. I could play by the IRS’s own rules and still pay nothing.

II. Is This Method Right for You?

People use many different methods of tax resistance. None of these is the right method for everybody. The method you choose will depend on your situation and on what you hope to achieve. I cover only The DON Method in this guide.

Questions You Should Ask

Before deciding on a method of tax resistance, you should ask yourself some questions about your situation, your motives, and your goals. For instance:

“Do I want to stop paying all federal income taxes, or just taxes that pay for things I disapprove of?”

Some people don’t object to being taxed by the gov­ern­ment, they just object to how the gov­ern­ment spends some of that money. Some war tax resisters, for instance, aren’t opposed to taxes on principle, but do object to the gigantic military budget. Some of these people protest by trying not to pay only that percentage of their taxes that goes to military spending. Others avoid paying taxes altogether, but then voluntarily pay a portion of what they would have paid in taxes for things of community benefit that they feel the gov­ern­ment underfunds. The DON Method is more ap­pro­pri­ate to people who want to stop paying any federal income tax at all.

Also, the DON Method is only designed to eliminate your federal income tax burden. You’ll still be paying other taxes — for instance the payroll (FICA) tax. If you want to avoid these taxes also, you’ll have to choose another method or supplement this method.

“Would I be comfortable living on less money?”

And if so, how much less? For many people it is possible to avoid paying federal income tax without living on much less. More than two in five households today are already living under the tax threshold. But if you’re used to earning and spending a lot of money, or if you have debts or other obligations that require you to earn and spend a lot of money, the DON Method might not work for you. Read on, though, because you may be surprised at how much you can earn and still be prac­tic­ing DON.

“Am I willing to break the law?”

If not, don’t worry — DON is legal. But if you are willing to break the law, there are other tax resistance options you might find appealing. For instance, you could supplement The DON Method by earning undeclared income in the romantically-​named “underground economy.” Or you could hide your income in sneaky trusts and offshore accounts. Or you could file returns that falsely state your income and claim de­duc­tions and credits that you don’t actually qualify for. The sky’s the limit. Of course, you run the risk of getting caught and so forth.

“Do I want to fight for currently unrecognized in­ter­pre­ta­tions of tax law?”

and “Am I willing to risk the wrath of the IRS & courts?”

Some people use tax avoidance methods that aren’t black-​and-​white illegal, but are certainly not approved of by the authorities. For instance, some people claim that they can’t pay taxes because they are obeying a higher law like that described in the Nuremberg Principles. Others claim that the income tax isn’t a legal obligation at all because no law authorizing it was correctly passed, or because such a law would be unconstitutional. The IRS and the courts are not sympathetic to arguments like these, but they occasionally meet with some limited success. The advantage of methods like these is that you earn as much income as you like, you don’t have to fuss about de­duc­tions and credits, and you still don’t pay any taxes. The disadvantage is that the gov­ern­ment may eventually crush you like a grape.

The DON Method is not like these methods. The DON Method is done by playing by the IRS’s own rules as it defines them.

“Is it important that my tax resistance be a protest — a confrontation with the gov­ern­ment — and not just a personal act?”

and “Do I want to stop cooperating with the gov­ern­ment in every way?”

Because The DON Method is done by-​the-​book and ac­cord­ing-​to-​the-​rules, some people feel that it doesn’t adequately express their opposition to the gov­ern­ment. If your blood pressure goes up every time someone asks for your Social Security number or some bureaucrat asks you to fill out a form, you’ll probably resent the pa­per­work and the at­ten­tion to the law that is required to get the most out of The DON Method. (But it’s really not all that bad, I promise).

It is certainly possible to combine The DON Method with another form of protest that is more confrontational. But if you don’t think the gov­ern­ment has any right to make you choose between carefully regulating your income and paying it taxes — or to force you to make a yearly confession of your income and expenditures in the first place — this might make you want to resist taxation in a more in-​your-​face manner.

III. How The DON Method Works

The DON Method works by taking two paths simultaneously. The federal income tax isn’t designed to tax all of your income, just your “taxable income.” So path #1 involves removing as much of your income as possible from the “taxable income” category.

Once you’ve done this, you’ll end up with a certain amount of “taxable income” and a certain amount of tax owed on it. But that’s not the end of the story. This tax can be offset, eliminated or even reversed into a “refund” by using various credits. Path #2 is qualifying for these credits.

Then, once you run the numbers and figure out how much money you can earn and spend without owing taxes, you need to take a look at your lifestyle and your goals and adjust them if necessary so that you’re living in your means at this income level.

That’s it, in a nutshell. The remainder of this guide will go into this in greater detail. By the end of the guide you should know enough that you can investigate for yourself if The DON Method will work for you.

IV. Path 1: Get Your Income Out of the “Taxable Income” Category

In the course of filling out a 1040 form, your “income” cascades through several levels, changing a little each time. The major levels are from income to “total income,” from “total income” to “adjusted gross income,” and finally from “adjusted gross income” to “taxable income.”

From income to “total income”

Income, in the abstract, is just whatever money you brought in over the course of the year. But “income” ac­cord­ing to the IRS is not so simple.

Some income is invisible to the tax collector. For instance, if you had money deducted from your paycheck to go into a 401k retirement account or a Health Savings Account — that is money you earned, but the IRS doesn’t include it in the year’s income.

There are other ways to shield your money from taxes. At my last job, for instance, I had money withheld from my paycheck to buy my bus and subway passes, and this money, like my 401k con­tri­bu­tions, did not register as part of my “total income.”

Keep your eye out for opportunities like this. If you’re on the payroll somewhere, ask around to find out what pre-​tax con­tri­bu­tions you’re eligible to make. Consider switching to a variety of health insurance that qualifies for Health Savings Accounts.

Your “total income” also includes any “capital gains” you might have made during the year — for instance, if you sold stock or property at a profit. On the other hand, if for instance you sold stock at a loss you can sub­tract this loss when cal­cu­lat­ing the “total income” (but only up to $3,000 — don’t worry if you lost more than this because you can save up the rest of the loss to use in future tax years).

Similarly, if you run your own business, the business loss or gain gets figured into your “total income.” Some tax resisters find that starting a home business is a good way of helping to regulate income — in years when income gets too high, they invest more in the business and take a business loss; in years when other income is low, they put more effort into making their home business profitable. (You can’t run your home business at a loss every year, though, or the IRS will decide that what you’ve got isn’t a business so much as a hobby, and your de­duc­tion may go away, retroactively.)

Among the other things that are added to your income are interest, dividends, alimony, and unemployment compensation.

This is just a brief introduction to some of the ways your “total income” is calculated. I haven’t gone into it in much detail because I’m really not qualified to go into specifics about how business expenses are handled (for instance) and such a dis­cus­sion would be too long for the purpose of this guide.

From “total income” to “adjusted gross income”

By “adjusted” they mean “lowered” because all of the ad­just­ments are de­duc­tions (so use as many of these as you can). Your “adjusted gross income” is what is used to calculate some of the credits that I cover in “Path 2” below — and the lower it is, the better.

One of the best of these de­duc­tions is for a tax-​deferred Individual Retirement Account (IRA) — not only because the money you put in (typically, up to $5,000) is deducted right away from your “total income,” but because by putting money in a retirement account you can qualify for a generous credit (which I’ll cover in the “Path 2” section below). Beware, though, that there are forms of IRA, such as the “Roth IRA,” that aren’t tax-​deferred and that won’t lower your adjusted gross income. Ask about the tax ramifications before you invest.

You can also “adjust” your income by spending money on tuition for higher education. Take a night-​school class at the local uni­ver­sity and you can deduct the price of your tuition from your “total income.” (Do a little re­search to find out what fees other than tuition also qualify for this de­duc­tion, and what kind of schools qualify). You may also be able to set aside money for your child’s higher education in a tax-​deferred account.

If you run your own business or are other­wise self-​employed, you may be able to take a number of de­duc­tions here on things like your health insurance costs, and part of the cost of your payroll taxes (FICA). If instead you’re working for someone else, and you had to move to a new home closer to work to get the job, you can deduct some of the moving expenses.

Other de­duc­tions are available for interest paid on student loans and on educational supplies bought by teachers. These aren’t the only de­duc­tions, and I haven’t covered any of them in much depth or detail. It’s just an overview to give you a feel for what is available.

From “adjusted gross income” to “taxable income”

There are two remaining de­duc­tions: the personal exemption, and the itemized or standard de­duc­tion. Once these are sub­tracted, you are left with your “taxable income.”

The personal exemption is just a certain amount of income that the law lets you have tax-​free, no questions asked. Don’t get too excited — it’s only $3,500. You also get a similarly-​sized exemption for each of your dependents.

The standard de­duc­tion is similar, and somewhat larger, but you have the option of either taking it or “item­iz­ing.” By item­iz­ing, you can take a whole mess of de­duc­tions for things like charitable donations, medical expenses, interest paid on loans, job expenses, tax preparation fees, and such. Even so, for a lot of people, the standard de­duc­tion is higher than their itemized de­duc­tions would be, so they’re better off taking the standard de­duc­tion instead. (About one-​third of filers itemize rather than taking the standard de­duc­tion.)

Once you’ve made these two de­duc­tions, you have your “taxable income” and you can look at the table in the back of the tax booklet to find out how much you’re supposed to pay up. But don’t get out the checkbook yet because you’re only half-​done.

Wait a minute — what about the “alternative minimum tax?”

In order to keep rich people from getting away with taking a lot of de­duc­tions and not paying any taxes (in other words to make sure that you can’t make too much money while doing The DON Method), the “alternative minimum tax” was invented.

If your “adjusted gross income” was up above the $40,000 range, you may have to worry about this. However, if it was that high, you’re probably not going to slip under the tax line anyway, so I’m not going to cover this in any more detail here. For most everybody using The DON Method, the “alternative minimum tax” won’t be an issue.

V. Path 2: Use Credits to Eliminate Your Tax Liability

There are a number of ways you can get tax credits. These credits are not de­duc­tions that are sub­tracted from your income, instead you sub­tract them directly from the tax you would other­wise owe. For instance, if you looked up your taxable income in the tax table and found that you should owe $750, but you qualify for a $500 credit — that credit is sub­tracted directly from the owed tax: $750 − $500 = $250.

Among these credits is one for education expenses (but note you can either take this credit or the de­duc­tion on tuition I mentioned in “Path 1” above — not both). Another gives you a credit for income tax you’ve paid to a foreign gov­ern­ment. Another gives you a credit if you spent money on child care or dependent care. You also get a per-​child “Child Tax Credit.” My favorite credit, though (childless as I am), is the retirement savings con­tri­bu­tions credit.

Remember how when you put money into a 401k or an IRA you were able to deduct that amount from your income before cal­cu­lat­ing your tax? Well now it gets better. You can take a certain percentage of the first $2,000 you put into retirement accounts as a credit. If your “adjusted gross income” is low enough, that percentage is 50%, and your credit is as much as $1,000, which will drop your tax burden down to zero.

The “Earned Income Tax Credit” is a special creature. Most other credits allow you, at best, to lower your tax to zero. The Earned Income Tax Credit allows you to lower your tax below zero so that the gov­ern­ment actually owes you money.

In order to qualify for this, your adjusted gross income has to be very low (but you must have earned some income during the year). It’s also easier to qualify if you have at least one dependent child. Millions of people do qualify for the EITC (and many of them fail to take advantage of it), but it does typically require having a very low income — lower than is strictly necessary for The DON Method.

VI. Do the Math!

There’s only one way for you to find out if you can use the DON Method to eliminate your federal income tax burden. There is no substitute for sitting down and doing the math yourself or with the help of a professional.

The IRS has some helpful information at their web site and a toll-​free phone line for answering tax-​related questions at 1-800-829-1040. If you’re adventurous, you can create a spreadsheet to simulate your tax return, or you can obtain some software designed for the purpose, or sit down with a tax specialist to run the numbers.

Try out some different combinations of earnings, de­duc­tions and credits to find out which would work best for you, and then, based on that, figure out what your budget would be for the year if you were to follow through on that plan.

VII. Make the Ad­just­ment!

You’ll probably find that to use The DON Method, you won’t have to lower your income as much as you expected. But you may find that because you’ll be spending or saving some of it in particular ways in order to qualify for de­duc­tions and credits that there is less left over than you’re accustomed to.

At this point you can either throw up your hands and cry out “how can I live on so little?” or you can settle down and actually try to figure out how.

Keep in mind that what looks low to you probably looks like a fortune to the majority of people on earth — and that it probably doesn’t look all that bad to many of your fellow Americans either. Remember that more than 40% of the people who file taxes in the U.S. are living under the federal income tax line, many just because they don’t make a lot of money — not because they’ve made a special effort to do DON.

What would it take for you to live on less? It’s probably just a matter of spending less and spending more wisely. Maybe you have to work to get out of debt first, or maybe you have to give up an expensive habit or hobby. Or it may be more extreme: you may have to move to a less expensive home and change your lifestyle fairly radically. Or maybe you have to convince your spouse or children to go along with your crazy plan first. What­ever that next step is, it’s probably something you can start working on today.

Additional Benefits of a Reduced Income

You may find that there are other benefits to paying closer at­ten­tion to your spending and regulating your income. You may find that although your income goes down, your hourly wage rises — you’ll be making more per hour because you’re not giving a cut to the gov­ern­ment. You may also find that you don’t have to work as much as you used to — you can take more time off to do things you want to do.

You’ll probably also find that your state income tax falls to nothing or nearly nothing. You may discover that by lowering your spending, you’re participating in a “voluntary simplicity” lifestyle that decreases your environmental footprint and reduces the influence of superficial consumerism in your life. If you’re a follower of Jesus, you may come to fear less his warning that “It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.”

Money is taxed not only as income, but also can be taxed when you spend it (as excise taxes), and then again when some of it turns into profit where you spent it, and then again when that profit is used to pay more taxable wages or buy more taxed goods. If you spend less, you will also reduce the amount of money you’re pushing through this gantlet of taxation.

VIII. Conclusion

Now you know the basics of how to legally stop paying federal income tax by lowering your taxable income and by qualifying for tax credits. And you know what to do next, in terms of re­search and lifestyle reassessment. To help make things more vivid, I’ll conclude with a fictional example of someone prac­tic­ing The DON Method.