How you can resist funding the government → getting under the income tax line → how it’s done → IRAs, 401(k)s, and other retirement accounts

How you can resist funding the government → getting under the income tax line → how it’s done → IRAs, 401(k)s, and other retirement accounts

  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

Introduction

This guide shows you how 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 Congress sometimes changes it retroactively), and so my understanding may not be up-to-date. I am not an attorney 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.

This document is provided “as is” and there is no warranty of any kind, either express or implied. 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

In I decided to stop paying 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 learn that I could earn quite a bit of income, and live very comfortably, without paying federal income tax and without having to battle the IRS. I could play by their rules and still pay nothing.

Is This Method Right for You?

People resist taxes in many ways. The method you choose depends on your situation and on what you hope to accomplish. I cover only The DON Method in this guide.

Questions You Should Ask

Before you decide how to resist taxes, think 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, they just object to how the government spends some of that money. Some “war tax resisters,” for instance, don’t oppose taxes on principle, but do object to the gigantic military budget. Some of them protest by resisting only a percentage of their taxes, equivalent to the percent 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 more useful things that they feel the government underfunds. The DON Method is more appropriate for you if you want to stop paying any federal income tax at all.

However, the DON Method only eliminates your federal income tax burden. You may still pay other taxes — for instance the payroll (FICA) tax. To avoid those taxes also, you must either choose another method or supplement this method.
“Would I be comfortable living on less income?”
If so, how much less? Many people can avoid paying federal income tax without living on much less. In , about 40% of income tax filers in the United States paid absolutely no federal income tax throughout the year. It’s not rare. But if you’re used to earning and spending a lot of money, or if you have big debts or other obligations, the DON Method might not work for you. Read on, though, because you may be surprised at how much you can earn and still pay no federal income tax.
“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 income in the romantically-named “underground economy.” Or you could hide money 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 frowned on 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 the income tax isn’t a legal obligation 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 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 those 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?”
Because The DON Method is legal and by-the-book, some people feel it does not adequately express their opposition to the government. If your blood pressure rises every time someone asks for your Social Security Number, you’ll probably resent the paperwork and the attention to legal niceties that are required to get the most out of The DON Method. (But it’s really not all that bad.)

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.

How The DON Method Works

The DON Method takes two paths:

The federal income tax doesn’t tax all of your income, just your “taxable income.” Path #1 is to remove as much of your income as possible from the “taxable income” category.

Once you’ve done that, you’ll have some “taxable income” and some amount of tax owed on it. But you can offset this tax, or even reverse it into a “refund,” by using various credits. Path #2 is to qualify for these credits.

You use those paths to figure out how much money you can earn and spend without owing income tax. Then you look at your lifestyle and your goals and adjust them if necessary so that you can live within your means at that income level.

The remainder of this guide covers this in greater detail. By reading this guide you will be able to investigate for yourself if The DON Method will work for you.

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

When you fill out a 1040 form, your “income” cascades through several levels, changing a little each time: from income to “total income,” then to “adjusted gross income,” and finally to “taxable income.” Each stage gives you the opportunity to prevent some of your income from being taxed.

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 example, 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 that money in your income.

There are other ways to shield your money from taxes. For example, at one job, I had money withheld from my paycheck to buy my transit passes, and that money also did not register as part of my “total income.”

Keep your eye out for opportunities like this. Ask your employer what pre-tax contributions you can make. Consider switching to a variety of health insurance that qualifies for Health Savings Accounts, and then shelter some of your income by saving it to pay health costs.

Your “total income” also includes any “capital gains” you made during the year — for instance if you sold stock or property at a profit. You can also subtract some capital losses when you calculate your “total income”.

If you run your own small business or do gig-economy work, this profit or loss is also part of your “total income.” Some tax resisters find that having such 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 or reduce their business profit; in years when 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, 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 things like business expenses, 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 your adjusted gross income 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 $7,500) 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.

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).

Tax legislation passed in will allow filers to take a deduction of up to $1,000 for donations they make to certain types of charities.

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 is one remaining deduction: either the itemized deduction or the standard deduction. Once you subtract this, you are left with your “taxable income.”

By itemizing, you can take deductions for things like large charitable donations, medical expenses, state taxes, and such. But for most people, the standard deduction is higher than their itemized deductions would be, so they’re better off taking the standard deduction instead.

Once you’ve made this deduction, you have your “taxable income” and you can look in the tax table 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 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” is above $68,500, you may have to worry about this. However, if it is 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.

Path 2: Use Credits to Eliminate Your Tax Liability

Many tax credits exist. 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 the tax table says you owe $750, but you qualify for a $500 credit — you subtract that credit directly from the tax: $750 − $500 = $250.

One credit is for your education expenses. Another is for any 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,” and can also take a credit for any adult dependents you have.

A new credit introduced in gives you one dollar in credit for every dollar you contribute to certain non-profit organizations that provide private school scholarships, up to a maximum of $1,700.

My favorite credit is the retirement savings contributions credit. Remember how, when you put money into tax-deferred retirement account, you were able to deduct it from your income before you calculated your tax? Now it gets better. You can take a percentage of the amount you put into retirement accounts as a credit as well. If your “adjusted gross income” is low enough, that percentage is 50%, and your credit is as high as $1,000, which can cut your income tax to zero.

The retirement savings contribution credit is changing in . Instead of being a tax credit that offsets your taxes, instead the credit amount will be deposited by the government into your retirement account. So this will no longer be an effective way to eliminate your federal income tax, but may effectively offset it, which amounts to much the same thing.

The “Earned Income Tax Credit” is a special creature. Most 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 sort of credit 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.

Do the Math!

There’s one way to find out if you can stop paying income tax 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. 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 learn which would work best for you, and then figure out what your budget would be for the year if you follow through on that plan.

Make the Adjustment!

You’ll probably find that you don’t need to lower your income as much as you expected to stop paying federal income tax. 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, 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 that?” or you can settle down and actually 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 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 refuse to pay.

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 get out of debt first, or 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 lowering your income. For instance, even if your total 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 — you can take more time off to do things you want to do.

Your state income tax may also fall to nothing or nearly nothing. You may discover that by lowering your spending, you’re simplifying your life, decreasing your environmental footprint, and reducing 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), 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 reduce the amount of money you push through this gantlet of taxation.

Conclusion

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 make things more vivid, I’ll conclude with a fictional example:

Example:

By September, Joe Taxmenot had earned $46,000 at his job. $9,000 in 401k contributions were deducted from his wages, along with $5,400 for his Health Savings Account, $3,300 for FICA tax, and $2,750 for federal income tax. Then he decided he didn’t want to pay federal income tax anymore and he began to try to get that $2,750 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 he put some advertisements in magazines catering to authors and scriptwriters. By the time he finished with this, he’d spent $2,800 on his new business, but it started to pay off. He got his first of several freelance jobs in November, and his first check from a happy client ($2,000) arrived just before the end of the year.

Income ($46,000) − 401k deduction ($9,000) − Business Expense ($2,800) + Business Income ($2,000) = $36,200 TOTAL INCOME

Joe’s been lowering his expenses because he knew he might quit his job, but he’s still kind of strapped for cash. He needs to put $7,500 into an IRA to make the DON Method work for him. 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 puts the money in before the tax filing deadline next year. So he declares the $7,500 contribution on his tax return in February, but waits until he gets his refund check from the IRS before he actually makes the contribution.

Total Income ($36,200) − Health Savings Account contribution ($5,400) − IRA ($7,500) = $23,300 ADJUSTED GROSS INCOME

Joe takes an ordinary standard deduction because when he calculated his itemized deductions they didn’t amount to much.

Adjusted Gross Income ($23,300) − Standard deduction ($16,100) = $7,200 TAXABLE INCOME

Joe looks in the tax table for the tax on $7,200: $720. He then fills out the Retirement Savings Contributions Credit form. Because his Adjustable Gross Income is $24,250 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.

Income tax on $7,200 ($720) − Retirement Savings Contributions Credit ($720) = $0 tax owed

Joe files his return and soon gets a check for $2,750 from the federal government (the $2,750 that had been withheld from his wages for income tax). He remembers to put that check into his IRA as part of his $7,500 contribution. Over the course of the year, he’s put $16,500 away for retirement, put $5,400 away to pay his medical bills (or for retirement, if he stays healthy), and spent $2,800 to get his business off the ground. Subtracting the FICA that was taken from his paycheck, that’s left him $20,000 to spend however he wants, plus a business, plus $16,500 invested to spend in his old age and $5,400 to cover his health insurance deductible if need be. Not too shabby!

Wages ($46,000) + Business earnings ($2,000) − retirement savings ($16,500) − Health Savings ($5,400) − Business expenses ($2,800) − FICA ($3,300) = $20,000 free-and-clear

Compare this to Joe’s cousin Jane, who earns only $21,000 a year (less than half of what Joe brought in). By the time her taxes have been withheld from her wages — including about $500 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 much more money than 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.

Tom Cooley writes in about his experience with tax resistance:

I’m not an expert on these matters, but I’ll try to unravel some of these acronyms. A 401k is a tax-deferred retirement plan where your employer deducts some money from your paycheck (and may add in a little extra money) which is then held in an investment account set up by the employer (or, more likely, by some company that specializes in such things that your employer hires for this purpose). You have some limited control over where the money that you’ve put in this plan is invested (usually you can select from a handful of funds). You are not taxed on any of this money as it is being put into the plan, but you will be taxed after retirement when you start withdrawing the money (if you try to withdraw before retirement, you pay taxes and penalties). Typically you can put up to 15% of your income into a 401k.

An IRA is also a tax-deferred retirement plan (however there are also forms of IRA in which the tax is paid up-front, rather than at withdrawal time). You put the money into the account yourself, rather than having your employer do it by deducting money from your paycheck. Because you set up the account yourself, you have a lot more control over your investment options. You’re allowed to put $3,000 per year into a tax-deferred IRA (this number can change from year to year as the tax law changes).

An “SEP” is like a 401k plan in that your employer puts (typically up to 15%) of your paycheck in to this plan. However it’s more like an IRA in that you set up the account and have more control over the investment options.

The “new retirement savers contribution credit” is this “miracle form 8880” that I mention in the FAQ. In short, it gives you a tax credit if you’ve got a low income and still manage to put money into retirement accounts like the ones discussed above. The credit is meant as an incentive for poor people to save up for when they’re old and the Social Security system goes belly-up. The credit is at its maximum for people with an “adjusted gross income” below $15,000. If you can get your adjusted gross income down to that point, and you’ve put at least fifteen hundred dollars or so into one of these retirement accounts, you’re almost certainly 100% in the clear tax-wise. And your “adjusted gross income” is calculated after you’ve already deducted your contributions to tax-deferred retirement accounts from your income, so you get a double bonus.

Here’s an example: Alice, Brian, Celia and Don are unmarried people with no dependents. Alice and Brian each have a salary of $21,000 per year; Celia and Don each make $15,000. Alice puts away the maximum 401k contribution of 15% and also puts $3,000 into a tax-deferred IRA; Brian and Celia do neither; Don puts 8% of his paycheck into a 401k. Here’s how this works out for them:

AliceBrianCeliaDon
Income21,00021,00015,00015,000
401k contribution3,150001,200
IRA contribution3,000000
Federal Income Tax01,6307300
Total saved for retirement6,150001,200
Total available to spend this year14,85019,37014,27013,800
Total amount of salary kept21,00019,37014,27015,000

Note: This is over-simplified. It leaves out state taxes, social security and medicare contributions, and the effects of other deductions that people can claim.

There’s still the question of how your money gets taxed when you finally get around to withdrawing it at retirement time. I believe it gets taxed at whatever rate you’re paying then — so if you’ve planned well and are still comfortable living below the tax line then, you can withdraw funds at a slow enough trickle so that you will continue not paying taxes on them. I’m not sure if that’s the way the law works, though, so correct me if I’m wrong. And in any case, the law is subject to change and so it’s hard to predict how vulnerable these retirement funds are to future taxation.

Not much to report today. I’ve been working on the how-to guide a bit more — adding some links to info on the IRS’s web site and elsewhere and prettying-up the formatting.

A reader clued me in to the fact that the IRS will let you claim your IRA contribution before you actually make the contribution — as long as you actually do contribute the money before the tax deadline of April 15th. So it’s possible to claim your maximum $3,000 deduction when you file your taxes in February, but wait until you get your refund check to actually contribute to your IRA.

I changed my “example” in the how-to to reflect this.

Over at the tax law blog Start Making Sense, Daniel Shaviro shares the inside scoop from one of his informants:

[T]he Bush “tax reform” plan is likely to have three main elements: (1) make the tax cuts permanent, (2) fix the alternative minimum tax problem, and (3) enact enlarged (say, $7,500 per person per year) Roth IRA style tax-free savings accounts, including large incentives to convert from existing IRAs, 401(k) plans, and the like that were deductible up front.

The first one is no big surprise, and neither is the second one. Number three isn’t too new either, except for that “large incentives to convert” twist.

With traditional IRAs and 401(k) plans, you can deposit untaxed money that is taxed when you withdraw it later in life. With Roth IRAs, you deposit money that has already been taxed, and then when you withdraw it later, it’s tax-free.

So there’s this pool of money out there in traditional IRAs and 401(k) accounts that is due to be taxed sometime but hasn’t been taxed yet. If the Dubya Squad can come up with some way to convince people to let him tax it now instead of later, he can have more of our money to play with today without having to actually raise taxes. This follows the Dubya Squad modus operandi of spending freely today and sticking tomorrow with the bill.

Pretty sneaky, eh? How are they going to do this? Carrot or stick. Probably carrot — they might give a discount on the tax people pay when they transfer funds from a traditional IRA or 401(k) to a Roth or Roth-like IRA.

Here’s an example of how someone might be convinced to transfer their money from a tax-deferred account to a taxed account — I did it last year: In , I earned about $18,000. I ran the numbers and determined that I could have earned as much as $25,000 and still be under the federal income tax line. So I transferred $6,500 from my traditional IRA to a Roth IRA. That $6,500 is considered part of my income for (I left some wiggle room: $18,000 + $6,500 = $24,500).

This sort of transfer is legal, and there’s no penalty (as there would be if I just withdrew the money from the traditional IRA rather than transferring it to a Roth IRA) — but I do have to pay the tax on that $6,500 now instead of later. However, I pay that tax at my current rate of taxation, which, because my total income is so low, is 0%. So that $6,500 went from being money that I was due to be taxed on eventually to being money that was never taxed and never will be. (Although if the people who want to replace the federal income tax with a federal sales tax get their way, all that careful planning on my part will be wasted.)

This sort of transfer is sensible not only for those of us with a little space in our 0% zone, but for anyone who thinks that they’ll be in a higher income tax bracket when they retire than they are today. Of course, this is just guesswork, but in a case like mine where today’s rate is 0%, it’s a no-risk no-brainer. Depending on the incentives that the Dubya Squad tax reform plan offers in the future, though, this option may come to make more sense to even more tax resisters.

Kay Bell at Don’t Mess With Taxes answers a question I’ve been wondering about: when I reach retirement age and have to start withdrawing money from my IRAs and other tax-deferred retirement accounts, is there anything I can do to avoid the tax hit?

Here’s an idea for people who are faced with this situation today:

[A] provision of the Pension Protection Act that was signed into law in , allows taxpayers who are [at least as old as] 70½ to directly transfer money from an IRA to a charitable organization. By doing so, these filers don’t have to include the transferred money in taxable income.

This provision only lasts , though, unless Congress renews it:

, if you don’t need the IRA money, you can instead shift it — as much as $100,000 each year — directly to your favorite charity. That way it doesn’t count as taxable income to you since you never got your hands on it. The drawback: You can’t deduct the gift [as an itemized deduction].

Bell goes on to discuss the circumstances in which you might want to transfer funds to charity this way, and other circumstances in which you might want to withdraw funds from the accounts and then donate them (which would add to your income, but which would allow you to take an itemized deduction).

A few miscellaneous things that caught my eye recently:

At his blog, Pax Americana, “NTodd” has, among other things, been going through Gene Sharp’s list of 198 Methods of Nonviolent Action one-by-one, with a goal of blogging on each one in detail and providing some up-to-date commentary.

His latest is #86: Withdrawal of bank deposits, and he shares the story of how he’s withdrawn the money from his IRAs in support of his tax resistance.

…the IRA system is part of the whole IRS structure and allows me another chance to take money that I can refuse to pay taxes (and penalties) on now as protest. Sure, when they catch up with me it adds to my pile of infractions, but that’s part of the point, and I’ll have pulled even more of my consent from the matrix of control and war enabling the government’s revenue represents.

Part of my strategy for keeping my money out of the government’s hands has been to use tax-deferred retirement accounts like the IRA. One of the unintended consequences of this is that I now have a retirement nest egg that may hatch into a sitting duck for IRS seizure.

Under the rules of the game, (with some exceptions) I can’t withdraw this money until retirement-time. Meanwhile it sits in a brokerage account, vulnerable to government seizure, and there’s precious little I can do to protect it. If I were to withdraw all the money, NTodd-like, the IRS would add a big hunk of taxes due and penalties to what I’m already deciding not to pay voluntarily.

I suppose I could do this, or at least try to do it (I’m worried that there may be some automatic-withholding process that gets triggered when you try to cash in an IRA early and all at once). Then I could keep the money in a mattress, metaphorically-speaking, and safe from the grasp of the IRS. This is a bigger commitment than I’m prepared to make just now, but I’m considering it.

If you put money into a traditional IRA or 401k, that much of your income is sheltered from taxes — until you retire, and then you have to include withdrawals from your retirement accounts as potentially-taxable income.

But if you put money into a Roth IRA or 401k, it’s the other way around. You pay taxes on the money you earned and put into the accounts in the year you earn it, but then, when you withdraw from your Roth accounts in retirement, you get the money tax-free.

At least, that’s how it’s supposed to work. In setting things up this way, Congress made an implicit promise that the Congresses of the future won’t change the law to tax all of your Roth money a second time when you withdraw it. And Congress doesn’t have the power to bind future Congresses like that. Future Congresses are going to be scrambling to find money to pay off all the wars, bailouts, benefit programs, and so forth that today’s Congresses are authorizing but neglecting to fund.

So there’s good reason to expect that they’ll play the ol’ switcheroo. In fact, they’re already plotting:

The U.S. Congress has created a situation in which, after 2010, there may be a significant number of taxpayers holding an enormous amount of wealth the return on which they will claim should be permanently exempt from tax. This paper examines the policy choices available to Congress should it come to regret having allowed the creation of these tax-prepaid accounts. It focuses first on the general nature of traditional retirement accounts, and the ways in which Congress has and could be expected in the future to alter the terms of these accounts. It concludes that Congress should feel free to change the tax treatment and other terms of these accounts in ways that might significantly affect the value of existing accounts, just as it should feel free to change the tax treatment of any other asset or investment position. It then considers whether there is anything different about the tax pre-paid IRAs, especially those that are converted traditional IRAs. It concludes that although the claims of the holders of these accounts are qualitatively different from the holders of other tax-preferred investments, they should not be viewed as sufficiently different to render such accounts immune from any change. Nevertheless, the potential power of these claims suggests that Congress should avoid creating them in the first place.

Don’t say I didn’t warn you.

The good news is that I’ve got a paying gig that’s keeping me very busy. The bad news is that I’ve been very busy, and haven’t been able to update The Picket Line as much as I’d like.

: a bunch of links I thought were interesting enough to share but that I’ve given up hope about being able to weave in with some original commentary.

  • Michael Kinsley tactlessly wonders where the buck stops on the torture policy.
  • The European Court of Human Rights has denied an attempt by The Peace Tax Seven to establish that a country’s unwillingness to allow people to legally refuse to pay for military spending is a violation of the rights and freedoms set out in the European Convention.
  • Craig Hancock caught me on film at the San Francisco Tea Party rally. Twice.
  • The number and percentage of Earned Income Tax Credit claims that are fraudulent — those in which the person claiming the credit doesn’t qualify for it — has increased exponentially in recent years, and the IRS hasn’t been able to keep up.
  • Isaac Stanfield is reading David Beito’s Taxpayers in Revolt: Tax Resistance During the Great Depression and is blogging his observations along the way.
  • Winslow Wheeler tells us what to expect from the upcoming military budget and what deceptions and spin you’ll be seeing in the news coverage about it.
  • Beware of religions whose symbol is a man being tortured to death.
  • Vargarquista at anarkismo.net writes about Smuggling as a strategy of tax resistance (Spanish). This is a particularly urgent subject in countries that rely more on sales and value-added taxes than on taxes like poll taxes and income taxes that individuals can more directly resist. If the “FairTax” scheme that some are pushing in the United States ever came to pass, this would become more of an issue in the U.S. as well. (“Smuggling” is my best translation of “el contrabando,” but the author seems to include a lot of different sorts of underground-economy activity under that term.)
  • Here’s another article about the Basque country war tax resistance activists who have been making noise recently: Colectivos antimilitaristas y de mujeres promueven la objeción fiscal a los gastos militares en la campaña de IRPF (Antimilitarist and women’s groups to promote war tax resistance in income tax season)
  • David John Marotta has an intriguing idea about manipulating the timing of traditional-to-Roth IRA transfers and recharacterizations so as to maximize your tax-free capital gains. It’s somewhat complex but very clever. Basically, you do a traditional-to-Roth conversion into several different Roth accounts using as many different investment strategies. Then file tax extensions so that you extend the amount of time in which you can recharacterize those conversions. Wait and see which of your new Roth accounts appreciate the most; keep those (if any) as Roth accounts in which the appreciation will remain tax free and pay the taxes on the principle now. For the rest, recharacterize them as traditional IRAs again, and avoid paying taxes on them now. Follow the link for details and a more leisurely and clearer explanation.
  • Radley Balko at The Agitator reminds us of this section from Dubya’s address to the nation on when he was launching the Iraq War:

    And all Iraqi military and civilian personnel should listen carefully to this warning: In any conflict, your fate will depend on your actions. Do not destroy oil wells, a source of wealth that belongs to the Iraqi people. Do not obey any command to use weapons of mass destruction against anyone, including the Iraqi people. War crimes will be prosecuted, war criminals will be punished and it will be no defense to say, “I was just following orders.”

    I love the smell of moral clarity in the morning.

Some bits and pieces from here and there:

Some bits and pieces from here and there:

  • The Obama administration announced a few days ago that it would interpret the somewhat ambiguous existing law in such a way that would allow it to seize money from “Thrift Savings Plan” accounts to settle tax debts. These plans are a variety of 401k-like retirement savings account that are available to employees of the federal government.
  • The big health industry legislation that passed a while back included a little-noticed (at the time) provision that would dramatically expand the requirements of businesses to file 1099 forms to report their payments to other businesses. The IRS recently announced that, for now anyway, it plans not to require quite as much paperwork as the law at first glance seems to require.

    “We plan to use our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards,” said IRS Commissioner Douglas Shulman. “These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the law.”
  • The federal government also is expanding its use of direct deposit for payments it makes, and hopes to mostly phase out sending checks to people. From here on out if you want your Social Security, unemployment insurance, veterans benefits, railroad retirement, and so forth, you’ll either have to give Uncle Sam your routing and account numbers or you’ll have to settle for getting your money in the form of a debit card. This is being billed as a cost-saving measure (how expensive to mail all those checks!) but mailing out those plastic cards can’t be any cheaper, so I suspect it has more to do with being able to keep a closer eye on people’s money so as to narrow the size of the underground economy and make it easier to seize funds from people.

Some links that have graced my browser in recent days:

The Satyagraha Foundation for Nonviolence Studies recently came to my attention. It has a few pages that touch on tax resistance, including:

  • An interview with Kathy Kelly. Excerpts:
    Street Spirit
    Did the U.S. government ever press charges against Voices in the Wilderness for violating the sanctions?
    Kathy Kelly
    They would bring us into court with some regularity. It was curious because at one point there was a $50,000 fine. I thought, “What are you going to take — my contact lenses?” I just had to laugh. I mean, I haven’t paid a dime of taxes to the U.S. government as a war tax-refuser since 1980. So there is nothing they could take from me. The people that would go over were in the same boat. So good luck collecting from them!
    Spirit
    But as it turned out, they did fine your group $20,000, didn’t they?
    Kelly
    Yeah, they finally took us into court. And I think Condoleezza Rice inadvertently might have saved us. This is speculation on my part, but this much is true. Chevron settled out of court, acknowledging that they had paid money under the table to Saddam Hussein in order to get very lucrative contracts for Iraqi oil.
    Condoleezza Rice was the international liaison for Chevron while it was paying money under the table to get these lucrative contracts. So when we finally had our day in court, Sen. Carl Levin’s staffers were still digging up this information and it was beginning to become public evidence that Chevron, Odin Marine Inc., Mobil and Coastal Oil had all been paying money for these oil contracts under the table to Saddam Hussein.
    So there were big fish in the pond that broke the sanctions and there were little fish in the pond that broke the sanctions. I think some of the big fish said, “That is one hot potato. You drop that hot potato as fast as you can, and don’t make a big deal because those people are little fish but they’re mouthy little fish.” So they never tried to collect a dime from us. The money was just sitting there.
    Spirit
    Well, what exactly did happen to you when the U.S. government took you to court for violating the sanctions?
    Kelly
    We were found guilty and were fined $20,000. Federal Judge John Bates wrote in his legal opinion that those who disobey an unjust law should accept the penalty willingly and lovingly.
    Spirit
    Unbelievable! A federal judge lectures you about lovingly accepting this unjust fine using the words of Martin Luther King?
    Kelly
    Yes. We said to Judge Bates, “If you want to send us to prison, we will go, willingly and lovingly. We’ve done that before already. But if you think we will pay a fine to the U.S. government, then we ask you to imagine that Martin Luther King would have ever said, ‘Coretta, get the checkbook.’ We are not going to pay one dime to the U.S. government which continues to wage warfare.” At that time, supplemental spending bills appeared every year, sometimes two or three times a year, and congressional representatives and senators continued to vote yes on those spending bills for the military. So we said, “No, we won’t pay a dime of that fine.”
    Spirit
    You have also been a war tax resister for a long time.
    Kelly
    I’m a war tax refuser. I don’t give them anything.
    Spirit
    Oh, you’re not a 50 percent withholder, like many war tax resisters. You’re a 100 percent withholder?
    Kelly
    Yes, I’m a 100 percent withholder. I think war tax resistance is important but I happen to be a refuser. They haven’t got one dime of federal income tax from me since 1980.
    Spirit
    Why did you begin refusing to pay federal taxes entirely?
    Kelly
    I won’t give them any money. I can’t and I won’t. I won’t pay for guns. I don’t believe in killing people. I also don’t want to pay for the CIA, the FBI, the corporate bail-outs or the prison system. But particularly, I began as a war tax refuser. I wouldn’t give money to the Mafia if they came to my door and said, “We’d like you to help pay for our operations.” I’m certainly not going to pay for wars when I’ve tried throughout my adult life to educate people to resist nonviolently.
    Spirit
    How have you gotten away with not paying federal taxes ? Do you keep your income low?
    Kelly
    Many years I have lived below the taxable income. But in , someone from the IRS came to my home. I had in some years claimed extra allowances on the W-4 form. And I just don’t file. I haven’t filed . Now, that’s a criminal offense and they could put me in jail for a long time for that. If I was earning over the taxable income, I would just calculate how many allowances I have to claim so that no money is taken out of my paycheck. It says in the small print on the W-2 form to put down the correct number of allowances so that the correct amount of tax is taken out. Well, that’s easy. The correct amount of tax to take from me is zero, so I just do the math.
    Spirit
    Why do you think they haven’t come after you?
    Kelly
    Well, they have come to collect taxes. But I don’t have a savings account, and I don’t own anything. The IRS is like my spiritual director [laughs]. I don’t know how to drive a car, and I’ve never owned any place that I’ve lived in. I just don’t have anything to take.
    Spirit
    So has the IRS given up on even trying to collect?
    Kelly
    Once they came out to collect in 1998 when I was taking care of my dear Dad, who was wheelchair-bound, and a bit slumped over in the chair. Dad liked to listen to opera and I had a really awful old record player playing a scratchy record. I had been in the back of the house and I didn’t know she was coming, so I ran down to answer the door while the record player was making such a horrible noise. The apartment was fine but it only had a few sticks of furniture.
    The woman asked me if I was going to get a job, and I told her I couldn’t leave my father. Then she asked if I had a bank account, and I said no. She said, “And you don’t own a car?” And I told her I didn’t even know how to drive. Then she just kind of leaned toward me and said, “You know what? I’m just going to write you up as uncollectible.” And I said, “That’s a very good idea.” [laughs] They’ve never tried to collect since. There was just nothing to take! Zero. Nothing.
  • Correspondence between Bart de Ligt and Mohandas Gandhi. Here’s some of what de Ligt wrote in :

    On your side, you state that those who set themselves against Western wars pay, nevertheless, taxes, which are used by the State for war and the oppression of the colored peoples. That is quite true. In fact our anti-militarist struggle also is as yet only something very relative, and it must go on extending. But in any case, we have fixed clear and inflexible borders: we refuse absolutely all direct, personal participation in war and in its social and moral preparation. But several of us employ still other means of fighting against it.… Moreover, a few of us have already decided individually to refuse to pay any taxes, whilst the organization of which I am a member has already several times been the propagandist of collective refusal of taxation. But whereas refusal, even on a very restricted scale, to do military service has been morally and socially efficacious, the refusal to pay taxes by a restricted number of citizens only has so far had very little result, as the authorities, in confiscating property and inflicting fines, take possession of sums much larger than a direct payment of taxes would have brought them. From this point of view, your compatriots have already given some impressive examples of collective refusal, although they also were not able to avoid regular unfair demands of the Government.

    I think “the organization of which I am a member” may have been War Resisters International. Gandhi’s response to this point is an interesting one:

    A non-violent man will instinctively prefer direct participation to indirect, in a system, which is based on violence and to which he has to belong without any choice being left to him. I belong to a world, which is partly based on violence. If I have only a choice between paying for the army of soldiers to kill my neighbours or to be a soldier myself, I would, as I must, consistent with my creed, enlist as a soldier in the hope of controlling the forces of violence and even of converting my comrades.

    You can find more of Bart de Ligt’s thoughts on tax refusal, non-violent struggle, and Gandhi’s campaigns in the essay The Effectiveness of Non-Violent Struggle, also on the Satyagraha Foundation site.

And from the academic and related worlds:

Can You Keep War Bonds Out of Your So­cial­ly-Re­spon­si­ble In­vest­ments?

I researched the holdings of several of the most popular “socially responsible” mutual funds, including funds that explicitly screen out investments in military contractors and weapons manufacturers. I found that most of them loan money to the Pentagon by including treasury bonds in their holdings. How can war tax resisters invest without inadvertently extending a line of credit to the warfare state?

Read my article at the NWTRCC blog for more details.

I have, to my surprise, suddenly retired.

This has various ramifications, mostly pleasant ones, but among which is that I need to retool my tax resistance strategy. That strategy has until now involved avoiding or resisting taxation on earned income by means of things like tax-deferred retirement contributions. Now I have to prepare for a future without any earned income to speak of, in which I will instead be drawing down those tax-deferred accounts.

This is my first draft of a game plan for the coming years. There are a lot of moving parts and a lot of uncertainty, and so it’s been challenging to draw this up.

I decided not to adjust numbers for inflation. I figure that allowable HSA deductions, standard deductions, Social Security, etc. will more or less track inflation and so it will be a wash as far as my calculations are concerned. I also assume a 3% real rate of return on invested money, which I understand is considered to be on the conservative end of what is likely (but who knows?).

The further my plans go into the future the more unreliable they are because of all of the unknowns (what will the market do? what will Congress do about Social Security? will artificial intelligence turn us all into paperclips?). For want of a way to meaningfully plan for possible scenarios like the collapse of the U.S. government, the global dominance of artificial superintelligence, and so forth, my scenarios instead assume that the future will be more or less a later-to-arrive version of the present, in which I am older but playing essentially the same game by the same rules. I’m posting this here today in part so I can look back at it and laugh later.

The biggest unknown, or one that looms large in my mind anyway, is how long I’ll be around to enjoy retirement. One can’t count on even one more day, but one ought to plan ahead anyway. The typical life expectancy for someone my age is something like 81. But my parents are both alive and on the cusp of 90 and three of my four grandparents made it into their 90s too, so I think I should be prepared for the possibility that I may stick around longer.

My goal is to have a comfortable and secure retirement (and hopefully a long and healthy one) and to continue to successfully resist funding the U.S. government. Can I do that if I retire today?

Just about every year since I started resisting, I’ve put aside 40–50% of my income into tax-deferred retirement accounts and a health savings account (HSA). In years when my income was lower than it needed to be to avoid the federal income tax, I’ve transferred some of the tax-deferred money into a Roth IRA, taking that amount as current-year income while staying within the 0% tax bracket. A couple of years back I stopped using the HSA to pay for health expenses and started using it as another retirement savings vehicle.

Early Retirement: Ages 57½–59½

So I start with a pretty good hunk of change in retirement accounts. However, I’m only 57½. I cannot begin to tap these accounts without penalty until I turn 59½, with a couple of exceptions:

  1. I can withdraw from my HSA to pay for past health expenses I had paid for out-of-pocket (yes, I saved the receipts), and for current health expenses.
  2. I can withdraw from my Roth IRA any principal I added at least five years ago (but not any gains, or anything I added more recently).

So for the next two years, before I turn 59½, I need to live off of my current cash savings (~$24k) + about $2k from my HSA + about $38k from my Roth = $64k. Can I do that?

My current spending runs to about $27k per year in rent, food, etc. (not counting health expenses for which I could tap the HSA). $64k gives me twice that and then some, so that feels safe to last two years.

I have brought in only about $15k in earned income this year. But I was making HSA and IRA deposits as though I were going to earn a standard year’s income. As a result I have way more deductions than I need to shield that much income from income tax. This gives me the opportunity to generate more tax-free income by doing another Roth transfer this year, probably to the tune of $43k or so. That will help later on.

Pre-Medicare: Ages 59½–65

When I turn 59½ I can start drawing down both my tax-deferred and Roth IRAs as much or as little as I’d like. (Starting at age 75, required minimum distributions may change this calculus a bit; I’ll get to that later.)

If I pull no more than $22k from my tax-deferred IRA per year, and deposit the maximum (currently $5,400) in my HSA, this will result in an adjusted gross income less than the standard deduction, resulting in no taxable income. (This also ensures that I remain eligible for Covered California’s high-deductible health insurance plan, so I can make HSA deposits.) Because none of this income is considered earned income in the current tax year; there is also zero self-employment / social security tax. If I supplement that ~$16k spending money with another $21k from my Roth IRA, that gives about $37k in spending money.

For the next several years I hope that the IRS will continue to drop the ball on my past tax debt, letting it fall off the statute of limitations cliff year after year as they have for several years now. When they do this, I typically celebrate by making a charitable donation equal to the amount of the successfully resisted taxes. I hope to keep doing this, but this means subtracting $4–$6k from that $37k of spending money. But that still leaves me comfortably above my $27k budget, so I think I’m okay here.

Medicare Kicks In: Ages 65–69

When I have to join Medicare at age 65, I lose my high-deductible health insurance plan and can no longer contribute to my HSA. Medicare also has substantially more expensive premiums than my current plan. As a result, my healthcare expenses rise, and an important tax deduction vanishes.

This will be a good time to start tapping my HSA to pay for these extra expenses.

On the up side, my standard deduction increases to the You’re Officially Old level.

In 2037, if things go well, the last of my tax debts will be eliminated by the statute of limitations. I’ll make my usual charitable donation and will have no remaining federal tax debt.

Things are a little iffy toward the end of this 65–69 range: it’ll be touch-and-go depending on the market and on how frugal I’ve been in the previous years, but I may exhaust my Roth toward the end of this period. If so, I have options. I might tap the HSA to reimburse for past medical expenses (if I still have any stored up), or I might have to take more out of my tax-deferred IRA, which could put me into taxable income territory. Another option would be to apply for Social Security earlier than I otherwise planned to.

What if the IRS Seizes that Tax Debt?

The IRS has failed, for many years running, to collect taxes they say I owe them. But this isn’t because I have some great ninja asset-hiding scheme. I haven’t buried my IRA in a hole in a tax haven or anything like that. I’ve just been overlooked by a dysfunctional bureaucracy. That could change at any time.

The total amount I owe at this point is a little under $90k. If the IRS seizes money from some account of mine, that may have additional tax implications. If they seize it from a tax-deferred retirement account or from my HSA, the amount they seize would count as potentially-taxable income in the year it was seized. (I think early-withdrawal penalties are waived in such a circumstance, but if not, that too might be an issue if this happens before I turn 59½.) If they seize it from my bank account or from my Roth, that leaves less in those accounts for me to use to offset potentially-taxable income.

In short, such a seizure could throw a wrench in my plans, and I’d have to rejigger things.

Because it’s difficult to predict if, when, or in what manner this might happen, I haven’t tried to account for this in my scenarios. But it’s a Sword of Damocles that dangles over these plans and could disrupt them a bit.

One thing I’m unsure about is whether the act of beginning to draw down my retirement accounts will make those accounts more salient to IRS enforcers. I think they tend to be reluctant to seize money from retirement accounts; but this may be more the case when those accounts represent retirement savings than when they represent retirement income. It’s possible that beginning to take IRA withdrawals may trigger a levy.

Of the ~$90k in tax debt, about a third of it is interest and penalties added by the IRS to the amount I originally did not pay. If seized from me, I could apply to the War Tax Resisters Penalty Fund for reimbursement of these penalty-and-interest amounts. The fund has a good record of reimbursing requests like these, but it has not seen many requests in recent years, and a request for ~$30k would be an especially large one, so it is uncertain how much reimbursement I could expect from such an application. I am not sure whether such a reimbursement would officially be considered taxable income or more along the lines of a gift.

Social Security Kicks In: Ages 70–74

When I hit age 70, I must begin taking Social Security (I could start earlier, but I think it is to my advantage to wait). In current dollars, my expected benefit is about $35k/year. (The Social Security trust fund is expected to give out by then, which could mean a reduction in benefits if Congress has the guts to try that. This would change some of the numbers that follow, but not the basic strategy.) Social Security benefits are taxable, but only according to a strange formula:

  • If your “combined income” is < $25k, they aren’t taxed at all.
  • If your “combined income” is between $25k and $34k, half of your Social Security benefits become part of your adjusted gross income.
  • If your “combined income” is > $34k, 85% of your Social Security benefits become part of your adjusted gross income.

So my best bet for avoiding federal income tax entirely is to keep my “combined income” below $25k. What is “combined income” you ask? It seems to be whatever would be my adjusted gross income anyway (at this point: what I pull from my tax-deferred IRA, plus any Roth conversions) plus half of my Social Security benefits.

Naïvely, if I were to continue to withdraw about $20k/year from my IRA, my “combined income” would be about $38k, which is too much. So what can I do about that?

There’s a trick called “qualified charitable distributions” that allows retirees after age 70 to transfer money directly from their tax-deferred retirement accounts to certain types of charities; when they do so the amount of the transfer does not count as income. So if I get $35k in Social Security, withdraw $7k from my IRA to supplement that, and donate $13k to charity from my IRA, the numbers look something like this:

  • Spending money: $35k + $7k = $42k
  • Combined income: $35k÷2 + $7k = $24.5k
  • Adjusted gross income: $7k

So I remain tax-free despite the new income source, and indeed my spending money budget can go up. If I stay frugal, I can even use some of this extra money to rebuild my Roth by means of Roth conversions. That may come in handy later on when my HSA runs out (around age 77 according to my projections).

Social Security can be seized by the IRS to satisfy tax debt. (Typically only 15% of your check can be seized, but more can if The Man decides to make a big deal about it.) However if things go well I won’t have any remaining tax debt by the time I turn 70, so this won’t be an issue.

You may wonder why I plan to withdraw anything at all from my IRA at this point, since the Social Security benefit by itself wouldn’t be taxable and yet would be enough for me to live on comfortably. The answer is that I have to withdraw some of that money eventually — see below — and so there’s no real disadvantage to doing so at this stage if there’s plenty to be had. If I don’t have any spending needs to justify the withdrawals, I can take them in the form of Roth conversions and charitable contributions. If the market tanks, I can leave my IRA alone and coast on Social Security for a while.

Required Minimum Distributions: Ages 75+

At age 75, another rule kicks in: I must take a certain amount from my tax-deferred IRA every year whether I want to or not (up to now, whether and how much to withdraw has been entirely up to me). The amount I have to withdraw is based on the amount in the account and my age. Under the projections I’m working with, this will have the effect of slightly increasing the amount I withdraw from my IRA.

But because of the “qualified charitable distributions” trick described above, I can simply increase my charitable giving to match and thereby continue to keep my combined income and adjusted gross income numbers below their respective lines.

I’ve run the numbers through 2068 at which time, if I am still alive and kicking, I will celebrate my 100th birthday. Should I be so lucky, according to my best-guess estimates, I will have spent about $2.3 million in today’s money on my own modest upkeep during retirement, will have given about $600k to charity, and will still have a little gas in the IRA tank in case they’ve invented a miracle longevity pill or I want to leave a bequest somewhere or other. When I look at it that way, I feel astonishingly wealthy and fortunate (though fortune may have its own ideas for my future). Yet, when I describe my frugal retirement strategy to others I not infrequently am met with a response that suggests I’m consigning myself to sad poverty or something like that.

What if I have unusual expenses I haven’t anticipated here, e.g. I need long-term care or I want to take a bucket list vacation somewhere fancy or I want to replace my failing body with the latest consumer model robot parts? Well, I do have a considerable extra room in my potential budget if I’m willing to step over the taxable income line. If in some year I need to spend thousands of dollars on some emergency (or splurge) expense, I can withdraw a little extra from the IRA or I can neglect to make a charitable donation that year. This makes me vulnerable to income tax, but I can always just neglect to pay the tax and try my luck against the IRS enforcement bureaucracy, which has been a good bet thusfar.

Of course, nothing will turn out exactly like I’ve planned. Trying to project things 40 years into the future based on the current financial economy and political economy and my current lifestyle needs is nuts. But as a back-of-the-envelope calculation to help me figure out whether now is a good time to attempt to slip into a secure retirement and continue to resist, it’s been a good exercise and has given me the confidence to go ahead. It’s also helped me to plot out some strategies I can use along the way (if I stay alert for changes and remain flexible) to make things go easier.

ages 0-tax target strategy
57½–59½ AGI < $16,100 Limited Liquidity: Spend down cash, use Roth principal to supplement. Continue maximum deposit to HSA. Do Roth conversions to fill out your 0% bracket. Pay medical expenses without dipping into the HSA. Continue ~$5k/year charitable contributions. Your post-medical spending budget is ~$30k/year.
59½–65 AGI < $16,100 IRAs available: Tap tax-deferred IRA to the extent you can while remaining in the 0% bracket (~$22k). Otherwise pull from the Roth. Only do Roth transfers if you have extra room in your 0% bracket. Continue maximum deposit to HSA. Pay medical expenses without dipping into the HSA. Continue ~$5k/year charitable contributions. Your post-medical spending budget is ~$30k/year.
65–69 AGI < $19,050 Medicare: You must join Medicare, so you lose the health insurance plan that allows HSA contributions. Your standard deduction rises, so you can pull more (~$25k) from your IRA. Pull whatever else you need from the Roth. Medical expenses likely to rise (Medicare premiums and deductibles); budget about $6.5k for this, but pay from your HSA. Continue to make charitable donations until the last tax debt vanishes in 2037. Your post-medical spending budget is ~$30k/year.
70–74 CI < $25,000 Social Security: Your Roth may be depleted; you may have to rely on your tax-deferred IRA. You begin taking Social Security, about $35k per year. Make “qualified charitable donations” directly from your tax-deferred IRA to keep your combined income low. Make more Roth conversions if you can, as this will come in handy when your HSA gives out. Your post-medical spending budget is ~$40k/year.
75+ CI < $25,000 Required Minimum Distributions: Your Roth may be depleted, and your HSA is emptying as well. This makes it a little more difficult to stay in the zero-tax zone, but still manageable. Increase your qualified charitable donations to make up for additional IRA withdrawals. Your post-medical spending budget is ~$35–40k/year.

After doing some more research I’ve found a few snags and caveats in the first-draft tax-free retirement plan I posted . These are the most concerning ones:

  1. I planned that in a couple of years, I would drop my adjusted gross income considerably for a few years because I will have fewer tax credits I can play off against taxable income to get my tax rate down to zero. This is fine from a spending point of view, because I will be able to tap some additional income that does not appear in AGI. However, this threatens to push me out of the Covered California subsidized health insurance marketplace and onto its health-insurance-for-poor-people plan (Medi-Cal). If that were to happen, I would lose my high-deductible health insurance plan and would no longer be able to contribute to a health savings account. That would eliminate a nice tax deduction and also a good tax-free way of paying for health expenses later on in retirement, so I would like to avoid that if possible.
  2. Apparently you cannot use any portion of your required minimum distribution from an IRA to make Roth conversions. I hadn’t accounted for that in my original plan.
  3. The “combined income” factor that determines how much of my social security benefit becomes part of my adjusted gross income, and so potentially my taxable income, does not adjust for inflation under current law. Currently, if my CI is below $25k, none of my social security is taxable; if it is higher than that but below $34k, 85% is taxable; if it is higher than that, 100% is taxable. But those thresholds are set in stone by current law; if nothing changes, they will be the same in when I turn 70. In order to keep my CI that low, my spending budget has to stay low to match, but money won’t go as far then, so that represents a significant hit.
  4. Oh yeah, about that social security: Currently, the social security program is scheduled to start running short of money in , before I plan to start taking benefits. If nothing is done to fix this problem, benefits could drop to about three quarters of their currently-anticipated values.

Here are some thoughts on how I might address these conundrums:

  1. (Low AGI=no HSA) There are a few options here:
    • I could just take the hit and go on Medi-Cal. The loss of the deduction would mean I would withdraw less from my IRA during the years when I had intended to fund the HSA. Having less money in the HSA would mean I would have to pay for medical expenses from IRA withdrawals or from social security in my early 70s instead. Neither of those things breaks my plan, but it makes my zero-tax budgets slightly tighter.
    • I could let my AGI climb out of the zero-tax zone and take the federal tax hit. After all, I’ve been owing (and neglecting to pay) self-employment tax for years. If I were to owe and not pay a smaller amount of income tax, that would for practical purposes amount to the same policy I’ve long been operating under.
    • I could withdraw enough money from my IRA to raise my AGI sufficiently, but then spend that extra money on courses at the university up the street. That way I could qualify for the federal “Lifetime Learning Credit” with which I could eliminate any tax due on the higher income. That university has a good set of courses on artificial intelligence in its computer science department, and on the ethics of technology in its philosophy department, which both seem like good bets for positioning myself to be more capable to contribute meaningfully to humanity’s attempts to weather the incoming crisis. This currently seems like the most attractive option.
  2. (RMDs and Roth conversions) My options here appear to be two:
    • Stop making Roth conversions and have to start taking RMDs. Turns out that’s no big deal and doesn’t really change my plan much at all.
    • Take additional IRA withdrawals over and above the RMDs in order to make Roth conversions. I don’t think this is worth doing.
  3. (CI not indexed for inflation) I don’t have a plan for how to deal with this. The ramifications do not begin until , which is far enough out that I assume the law will change in some meaningful way by then, whether for the worse or the better, and I’m better off waiting to cross that bridge when I come to it.
  4. (Social Security unsustainable) If this happens, this will result in slimmer budgets for me during my social security years (after age 70), but nothing unendurable. However, as with the previous item, I assume that by then the law will have changed in some way. The politicians in Congress aren’t about to let every voter on social security take an abrupt 20% cut without trying to cook the books in some manner. Someone will have to get screwed to prevent that from happening, and I might very well be one of the someones, but it probably won’t be in the manner this scenario suggests.

OK. I’m getting pretty tired of running all these numbers, but I wanted to be extra careful to get things right. With much of the above (and several other smaller tweaks) incorporated into my game-plan, here’s how it’s shaking out now:

ages 0-tax target strategy
57½–59½ AGI < $17,100 Limited Liquidity: Spend down cash, use mature Roth principal to supplement. Continue maximum deposit to HSA. Do Roth conversions to fill out your 0% bracket. Pay medical expenses without dipping into the HSA. Continue ~$5k/year charitable contributions. Your post-medical spending budget is ~$30–35/year.
59½–65 AGI ~$23,000 IRAs available: Tap tax-deferred IRA to get to the minimum AGI necessary to keep your health plan (~$29–$30k/year). Beyond that, pull from the Roth (~$18k/year). Continue maximum deposit to HSA. Pay medical expenses without dipping into the HSA. Continue ~$5k/year charitable contributions. Your post-medical spending budget is ~$35–36k/year but you’ll need to spend $4–5k of that on university courses to qualify for the Lifetime Learning Credit to bring your federal income tax down to zero.
65–69 AGI < $20,050 Medicare: You must join Medicare, so you lose the health insurance plan that allows HSA contributions. Pull annually about $21k from your traditional IRA, and $18–19k from your Roth. Medical expenses are likely to rise (Medicare premiums and deductibles); budget about $6.5k for this, but pay from your HSA. Continue to make charitable donations until the last tax debt vanishes in 2037. Your post-medical spending budget is ~$33–35k/year.
70–74 CI < $25,000 Social Security: You begin taking Social Security, about $35k per year (Congress willing). Withdraw about $17k per year from your IRA, but donate the bulk of that ($15k) via “qualified charitable donations” to keep your combined income below the (hopefully similar to today) 0% threshold. In addition, do $5k/year in Roth conversions, as this will come in handy when your HSA gives out. Your post-medical spending budget is ~$37k/year.
75+ CI < $25,000 Required Minimum Distributions: The required minimum distributions do not change the pace of your traditional IRA withdrawals very much, putting them in the $18k–25k per year range. In addition, you can take $1–2k per year from your Roth; more if you have reason to expect your dreams/nightmares of living into your 90s will be thwarted. Your HSA is depleted or soon will be, so you’ll be paying for medical expenses out of your IRA withdrawals instead. Stop doing Roth conversions. Keep up your qualified charitable donations of $12k–$18k per year to keep your combined income sufficiently low. Your post-medical spending budget is ~$36–38k/year.