How To Resist the Federal Income Tax with the “Don’t Owe Nothin’” Method
- Is this method right for you?
- How The DON Method works
- Path 1: Get your income out of the “taxable income” category
- Path 2: Use credits to eliminate your tax liability
- Do the math!
- Make the adjustment!
- Conclusion and Example
This “how-to” guide shows you 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.
IMPORTANT: This guide was last updated in and is based on my understanding of tax law at that time. Tax law changes from year to year, and so my understanding may not be up-to-date. I am not an attorney, an accountant or a tax expert. I’m sharing what I know, or what I think I know, and you’d be wise to get a second opinion on anything you read here from someone who really knows what they’re talking about.
This document is provided “as is” and there is no warranty of any kind, either express or implied, including (but not limited to) any warranty of merchantability, fitness for a particular purpose, or non-infringement. This document is intended to provide general information and is not intended to be applied to any particular facts nor to serve as legal advice. The author is not responsible for any errors or omissions or for any consequences of any reliance on this document.
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 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 by taking credits that reduced my income 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.
People use many different methods of tax resistance. None of these is the one right method for everybody. The method you choose depends on your situation and on what you hope to achieve. I cover only The DON Method in this guide.
Questions You Should Ask
Before you decide 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 resisting 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 for people who want to stop paying any federal income
tax at all.
Also, the DON Method only eliminates your federal income tax burden. You’ll still pay 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 income?”
- And if so, how much less? Many people can avoid paying federal income tax without living on much less. In , about 45% of households were already living under the income 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 practice 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?”
“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 because no law
authorizing it was correctly passed, or because such a law would be
and the courts are not sympathetic to such arguments, but they
occasionally meet with 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 plays 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?”
“Do I want to stop cooperating with the government in every way?”
- Because you do The
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
Method. (But it’s really not all that bad, I promise).
You can certainly 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 taxes on it — 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.
The DON Method works by taking two paths.
Since the federal income tax isn’t designed to tax all of your income, but just your “taxable income,” 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. You can offset or eliminate this tax, or even reverse it 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 income tax, you take a look at your lifestyle and your goals and adjust them if necessary so that you can live within your means at this income level.
That’s it, in a nutshell. The remainder of this guide covers this in greater detail. By the end of the guide you should be able to investigate for yourself if The DON Method will work for you.
When you fill 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 is just whatever money you brought in during 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 the IRS doesn’t include it in your income.
There are other ways to shield your money from taxes. At my last job, 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 what pre-tax contributions you can make. Consider switching to a variety of health insurance that qualifies for Health Savings Accounts.
Your “total income” also includes any “capital gains” you 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 you calculate your “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, your profit or loss is part of your “total income.” Some tax resisters find that having a business helps them to regulate income — in years when income gets too high, they invest more money in their business and take a business loss; in years when other income is low, they put more effort into making their business profitable. (You can’t run your 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 part of your “total 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 this guide.
From “total income” to “adjusted gross income”
“Adjusted” means “lowered” because all of the adjustments are deductions (so use as many as you can). You use your “adjusted gross income” to calculate some of the credits that I cover in “Path 2” below — and in general, 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 you can deduct the money you put in (typically, up to $5,100) from your “total income,” but because when you put money into a retirement account you can qualify for a generous credit (which I’ll cover in the “Path 2” section below). Be aware, 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. (Do a little research to find out what fees other than tuition also qualify for this deduction, and which 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 deductions here on things like your health insurance costs (depending on the state of the tax law, you may be able to take this as a simple business expense, or as a separate tax line item), 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 your moving expenses.
Other deductions are available for interest paid on student loans and for 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 you subtract these, you are left with your “taxable income.”
The personal exemption is a certain amount of income that the law lets you have tax-free, no questions asked. Don’t get too excited — it’s only $3,900. 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 either to take it or to “itemize.” 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. 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 well-off 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 above $40,000, you may have to worry about this. However, if it was that high, you probably won’t 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.
There are a number of ways you can get tax credits. These credits are not deductions that you subtract from your income. Instead you subtract them directly from the tax you would otherwise owe. For example, 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 — you subtract that credit directly from the tax: $750 − $500 = $250.
One of these credits is for education expenses (but note you can either take this credit or the tuition deduction I mentioned in “Path 1” above — not both). Another is for income tax you’ve paid to a foreign government. Another is for your child care or dependent care expenses. 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 you calculated 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 cut your income tax 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. This is called a “refundable credit.”
In order to qualify for the Earned Income Tax Credit, your adjusted gross income must be very low (but you must have earned some income during the year). It’s easier to qualify if you have at least one dependent child. Millions of people qualify for the EITC, but it does typically require having a very low income — lower than is strictly necessary for The DON Method.
There’s only one way to find out if you can eliminate your income tax burden by using the DON Method. There is no substitute for sitting down and doing the math, either by 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 (800) 829‒1040. If you’re adventurous, you can create a spreadsheet to simulate your tax return, or you can get specialized tax software, or you can sit down with a tax specialist to run the numbers.
Try out different combinations of earnings, deductions, and credits to find out which would work best for you, and then figure out what your budget would be for the year if you were to follow through on that plan.
You’ll probably find that you won’t have to lower your income as much as you may have expected to use The DON Method. But you may find that because you’ll be spending or saving some of your income 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 “but how can I live on that?” 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 about 40% of people who file taxes in the U.S. live under the federal income tax line, most 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 more radically. 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 other benefits to paying closer attention to your spending and regulating your income. For instance, although your income goes down, your hourly wage rises — you make 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 simplifying your life in a way that decreases your environmental footprint and reduces the influence of superficial consumerism in your life. If you’re a follower of Jesus, you may 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.”
The government taxes money not only as income, but also when you spend it (as excise and sales 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, will also reduce the amount of money you push through this gantlet of taxation.
Now you know 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:
By September, Joe Taxmenot had earned $40,000 at his job. He had $6,000 in 401k deductions deducted from his wages, along with $3,100 for his Health Savings Account to pay his insurance deductible, $300 for pre-tax commuter checks, $3,060 in FICA, and $2,060 in federal income tax. Then he decided he didn’t want to pay federal income tax anymore and he began to try to get that $2,060 back by using The DON Method.
He quit his job and started a business doing freelance manuscript editing. He went through the paperwork and fees involved to get a business license, and, to get the word out about his business, he put some advertisements in magazines catering to authors and scriptwriters. By the time he finished with this, he’d spent $2,000 on his new business, but it started to pay off. When the magazines came out with his ads, he got his first of several freelance jobs in November, and his first check (only $150) arrived just before the end of the year.
He then sold some stock he’d bought in better economic times. This brought in another $1,250 in income (but he’d bought the stock for $5,000 so he really got hosed — $3,750 in losses). He can take $3,000 of those capital losses as a deduction this year and save the leftover $750 for next year’s taxes.
Income ($40,000) − 401k deduction ($6,000) − commuter checks ($300) − Business Expense ($2,000) + Business Income ($150) − Capital Loss ($3,000) = $28,850 TOTAL INCOME
Joe’s been lowering his expenses all year because he knew he might be quitting his job, but he’s still kind of strapped for cash. He needs to put $5,500 into an IRA to make the DON Method work for him, though. He does some research and discovers that the IRS will let him take credit for putting money into an IRA before he actually makes the contribution, as long as he eventually puts the money in before the April 15th tax deadline next year. So he goes ahead and declares the $5,500 contribution on his tax return in February, but waits until he gets his refund check from the IRS before he actually makes the contribution.
He also takes $2,500 worth of classes from the local university’s extension series to help with his business and editing skills.
Total Income ($28,850) − Health Savings Account contribution ($3,100) − IRA ($5,500) − Tuition ($2,500) = $17,750 ADJUSTED GROSS INCOME
Joe can only take a single personal exemption and an ordinary standard deduction because he doesn’t have any dependents and when he calculated his itemized deductions they didn’t amount to much.
Adjusted Gross Income ($17,750) − Standard deduction ($6,100) − Personal exemption ($3,900) = $7,750 TAXABLE INCOME
Joe looks in the tax table for the tax on $7,750: $775. He then fills out the Retirement Savings Contributions Credit form. This form says that because his Adjustable Gross Income $17,750 or below, he can take 50% of the first $2,000 that he put into retirement accounts (like his 401k and IRA) as a tax credit. This is a $1,000 credit. Alas, the IRS won’t let you take more of this credit than you owe in taxes, so it only eliminates the tax rather than converting it into a refund. However, Joe is satisfied and claims victory.
Tax on $7,750 ($775) − Retirement Savings Contributions Credit ($775) = $0 tax owed
Joe files his return and in a few weeks gets a check for $2,060 from the federal government (The $2,060 that had been withheld from his wages for income tax). He remembers to put that check into his IRA as part of his $5,500 contribution. Over the course of the year, he’s put $11,500 away for retirement, put $3,100 away to pay his medical bills (or for retirement, if he stays healthy), spent $2,500 on university classes, and another $2,000 to get his business off the ground. Subtracting the FICA that was taken from his paycheck, that’s left him $19,240 to spend however he wants, plus a business, plus some new education, plus $11,500 invested to spend in his old age and $3,100 to cover his health insurance deductible if need be. Not too shabby!
Wages ($40,000) + Stock sold ($1,250) + Business earnings ($150) − retirement savings ($11,500) − Health Savings ($3,100) − Tuition ($2,500) − Business expenses ($2,000) − FICA ($3,060) = $19,240 free-and-clear
Joe figures he can live on $19,240 pretty easily, and can even save up a little for when he runs out of that rotten bubble stock and he has to squeeze things a little tighter. He figures he’ll probably be pretty good at living on the cheap by then, though.
Joe’s cousin Jane earns only $20,500 a year. By the time her taxes have been withheld from her wages — including about $1,000 in federal income tax — she has less free-and-clear take-home income than Joe does. She can’t believe that Joe, who brought in almost twice what she did last year, and has all that savings to show for it, doesn’t have to pay any federal income tax at all. She’s going to go through the numbers herself and see if maybe she could try the DON Method too.