Seven Ways to Lower Your Cost of Government

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For most people, especially those doing the 9 to 5 grind in a high-tax state, their biggest household expense is government. Way back in October of 2015, I wrote a post based on the household expenses of a California family being featured in Money magazine. The total tax bill for this family was $45,000. This amounted to 31% of its household income. Its next largest expense, the mortgage, ate up 16% of its household income.

One piece of advice you typically see to reduce your tax bite is to increase your contributions to tax-advantaged accounts such as a 401(k), a 403(b), and a traditional IRA (see here, here, and here). But this strategy isn’t a tax reduction at all. It’s really just a tax deferment. You save on taxes in the current year but create a tax liability for future years. Some people believe that that’s a good trade-off. Taxes deferred are usually taxes saved. But the national debt exceeds $22 trillion and unfunded liabilities exceed $124 trillion. Something tells me that there ain’t gonna be trivial income tax rates for anyone in the not-too-distant future, even for the schlubs with puny incomes.

So how does one save on taxes rather than defer taxes? Here are seven groovy ways.

Seven Groovy Tips to Lower Your Taxes

Downsize Your Home

A bigger home will have a larger property tax bill than a smaller home, providing they’re both situated in the same tax jurisdiction, of course. And since a bigger home generally needs more electricity and fossil fuels than a smaller home to operate, the owners of bigger homes will face higher utility-related sales taxes than the owners of smaller homes.

If you want to lower your tax bill and you live in a large home, downsize to a smaller home.

Egotrage Your Zip Code

Highfalutin zip codes have highfalutin property taxes because they have highfalutin public schools.

Here’s a dirty little secret. Beyond a rudimentary investment in education resources (i.e., teachers, classrooms, and books), the success of a student really depends on how bright and studious that student is. In New York, for instance, the average school spends over $22,000 per pupil. By contrast, the average North Carolina school spends under $9,000 per pupil. And, yet, despite spending two and a half times as much as North Carolina, New York State’s average SAT score is identical to North Carolina’s—1062.

Since bright and studious students don’t need the best-paid teachers, the best classroom trappings, and the best athletic facilities to do well academically, you won’t be cheating your kids—should you have any—if you reside in an ordinary zip code with ordinary public schools.

If you want to lower your property tax bill, and you live in a highfalutin zipcode with highfalutin public schools, move to an ordinary zipcode with ordinary public schools.

Move to a Low-Tax State

Way back in 2006, my last year residing on Long Island, my property tax bill for my 600 square foot condo was $5,400. In 2007, my first full year residing in Charlotte, North Carolina, my property tax bill for my 980 square foot condo was $900. That’s a property tax reduction of 83 percent. And since geoarbitrage only reduced my household income by 24 percent, moving to Charlotte proved to be an excellent way to cut my cost of government and have more discretionary income.

Fast forward to the present and the same situation prevails. The current property tax on Groovy Ranch is $204 annually. But that’s only because the county still recognizes Groovy Ranch as unimproved land. Next year’s property tax bill will account for the Groovy Ranch build and it should be in the $1,500 to $1,800 range annually. That’s still a far cry from the property tax bite on Long Island, though. If Groovy Ranch were built in a similar neighborhood on Long Island, the property tax bill would be in the $12,000 to $14,000 range annually.

Now consider the staggering financial ramifications of this geoarbitrage. Over the next ten years, I’ll pay roughly $15,000 in property taxes. Had I remained on Long Island and bought a home equivalent to Groovy Ranch, my property tax bill for the next ten years would be around $120,000. That’s over a one hundred thousand dollar difference.

If you’re location independent or flexible and you live in a high-tax state, move to a low-tax state—particularly a state with low property taxes. Your cost of government will go down dramatically.

Move Overseas

This may be the ultimate way to legally eliminate your federal tax liability, providing you make less than $104,100 annually while living overseas. Yep, that’s right. The Foreign Earned Income Exclusion allows you to exclude the first $104,100 you make overseas from your taxable income on your federal return.

If You’re A Low-Income Person, Take Advantage of Tax-Free Capital Gains

The difference between your taxable income and the 12 percent tax bracket limit is the sweet spot for the ultimate capital gains tax loophole. Any capital gain that falls within this window is taxed at zero percent. Here’s an example of how it works.

Let’s suppose you’re married and you and your spouse had a gross household income of $30,000 in 2018. But because our federal tax code is designed to apply the federal tax bite progressively, you and your spouse were entitled to a standard tax deduction of $24,000. This means your taxable income in 2018 came to $6,000.

Now, for 2018, the upper income limit of the 12 percent tax bracket for married couples filing jointly was $77,400. So this means you and your spouse could have sold enough stocks from your portfolio to realize a capital gain of $71,400 (the difference between your taxable income and the upper income limit of the 12 percent tax bracket), and you would have owed the federal government jack squat on that capital gain. How freakin’ groovy is that!

If you have a low income and have managed your finances well enough to have a portfolio with long-term capital gains, do yourself a favor and realize those gains. The federal government is throwing you a tremendous tax-free bone.

Quick aside. I’m pretty sure that the zero percent capital gains tax rate is based on the window between your taxable income (gross income less deductions) and the upper income limit of the 12 percent tax bracket, not your income and the upper income limit of the 12 percent tax bracket. If I’m wrong, please let me know. I’ll make whatever corrections are necessary to this post.

Become Financially Independent with a Low-Income

Income-poor, asset-rich financial independence is the greatest tax loophole ever devised by man. Here, in a nutshell, are the glories of being poor, rich, and financially independent.

If you…

• Are financially independent (i.e., you have at least 25 times your annual living expenses in the bank or various investment accounts)
• Have a low income (i.e., your income is between 1.5 times and 2 times the federal poverty level for your household), and…
• Reside in a low-tax state (e.g., North Carolina)

You will…

• Pay little in income and property taxes and…
• Have plenty of money to lead a fabulous life

And, because of Obamacare…

• You will get a very large healthcare subsidy, and…
• This subsidy will be so large you’ll have an effective tax rate in the negative territory

Mrs. Groovy and I are prime examples of the glories of being poor, rich, and financially independent. The amount of taxes we pay to the feds and North Carolina are a fraction of our Obamacare subsidies. We thus have an effective tax that is very much negative.

Quick aside: To calculate my effective tax rate, I took the total amount of taxes we paid the feds and North Carolina and subtracted our Obamacare subsidy from that amount. I then took the result of that calculation and divided it by our household income. 

Another quick aside: I’ve said it before, and I’ll say it again, Mrs. Groovy and I shouldn’t be treated like One Percenters. Obamacare subsidies should be based on income AND net worth. But don’t expect sanity to descend upon Capitol Hill anytime soon—at least not on this ridiculous loophole. The number of people who are taking advantage of this loophole is small, and the politics of Obamacare are very contentious. Our intrepid congresspeople thus have very little incentive to upset the status quo and smite this travesty. Sad.

Taxpayer Nullification

Okay, how can I remain the bad boy of the FIRE community if I didn’t bring up at least one controversial way to lower your taxes? Here we go.

Suppose for the moment that I had a good friend—Mr. Sickofthebullsh*t—and one night we had the following conversation.

Mr. Sickofthebullsh*t: I don’t think our politicians are good stewards of my tax dollars. In fact, I think they’re screwing me royally.

Me: How so?

Mr. Sickofthebullsh*t: Well, NATO for one.

Me: NATO? Whatd’ya mean?

Mr. Sickofthebullsh*t: I’m getting really sick and tired of European haughtiness. First, they mock us for our gun laws. Then they mock us for our lack of socialized medicine. And now they mock us for Trump. And, yet, we’re the ones shouldering most of the responsibility for their defense. Why? Why do our politicians tolerate such miserable ingrates? If I were in charge, I’d tell the Europeans to f*ck themselves. Take your moral superiority and defend yourself against the Russians.

Me: I see your point, but what about…

Mr. Sickofthebullsh*t: And then there’s all that cronyism nonsense. I can’t take it anymore. Everywhere I turn, some politically-connected butthole is laughing all the way to the bank—on my freakin’ dime. 

Me: Whoa! You’re pretty riled up. I understand that government and corruption go hand in hand. But are things really that bad?

Mr. Sickofthebullsh*t: They are. We bailed out the automakers and the banks. Next up is a bailout for all those poor schmucks with student loan debt out the whazoo—which is really a backdoor bailout of higher education and its failed business model. Yep, higher education, no worries. You can continue to charge the naive and desperate an incredible amount of money for an increasingly suspect credential. But as bad as the bailouts are, the protectionism is worse. At every level of government, the organized and moneyed use their influence to curry political favor and hamstring their rivals. Just the other day, I saw a YouTube video that claimed that selling llama poop was illegal. Really? Did the cow poop industry lobby for that regulation? It’s one thing when the big boys practice such shenanigans. I understand Apple, GM, and Exxon teaming up with the government to screw us over. But when the likes of the cow poop industry start doing it, that’s end-of-days level corruption.

Me: Okay, things are bad. I agree. What do you suppose we do? Vote for more enlightened politicians? We’ve been trying that my whole adult life—nearly 40 years now—and it isn’t working.

Mr. Sickofthebullsh*t: Well, I don’t know about you, but I’m increasing my amount of undocumented income as much as I can.

Me: Wait—what? What the hell is undocumented income?

Mr. Sickofthebullsh*t: Whenever I do electrical work on the side now, I do it for cash or gift cards. No more checks. This means that extra income is undocumented. The tax authorities have no idea I earned it.

Me: Yeah, so what? You still have to claim it on your tax return.

Mr. Sickofthebullsh*t: No I don’t. If something’s undocumented, the laws of the United States no longer apply. Check out the millions of illegals in this country. They’re taking jobs, driving down wages, and sucking up public resources. And do our politicians give a sh*t? Hell no. The Democrats make a mockery of the rule of law because they’re looking to enlarge their voter base. And the Republicans make a mockery of the rule of law because they’re looking for cheap labor to enrich their donor base. Well, three can play that game. I can flout the rule of law just as well as the Democrats and the Republicans.

Me: So are you saying that two wrongs make a right?

Mr. Sickofthebullsh*t: I don’t know what I’m saying. All I know is that the government is showing utter contempt for me and I’m just returning the favor. F*ck ’em. 

I, of course, can’t advocate working off the books and refusing to claim that income on one’s tax return. Cheating on one’s taxes is a crime, plain and simple. But I sympathize with Mr. Sickofthebullsh*t and all the other Mr. Sickofthebullsh*ts out there. To me, this kind of tax evasion is very much like jury nullification. In case you don’t know, jury nullification is when I jury finds a guilty man innocent because they believe the law he broke is immoral. Well, because our government is so corrupt—and, yes, so immoral—I can’t blame anyone for practicing taxpayer nullification—that is, I can’t blame anyone for hiding income from a corrupt and immoral government when that income isn’t traceable.

Final Thoughts

Okay, groovy freedomist, what say you? Are these great ways to reduce the cost of government? And what do you think of the last tactic? Are those who engage in taxpayer nullification scoundrels? Or are they freedom fighters pushing back against our ruling oligarchy with the only means at their disposal? Let me know what you think when you get a chance. Peace.