How to Pay No Taxes on $100,000 Income in 2021 [Standard Deduction]

In this article, we will show you how to pay zero federal taxes in 2021 while making $100,000. I know, I know, $100,000 tax free sounds too good to be true. In some ways it is because of the caveats. Not everyone can do this, but if you are already retired, it is likely you can take advantage of this. If you are an aspiring early retiree, you definitely need to know about this too. There are no crazy tricks or deductions, so you can definitely earn even more income and still not pay any federal taxes according to the IRS rules and if you don’t have complications. In the example we will cover, we will use the standard deduction, so if your itemized deductions exceed this, you will be able to make a ton more money without paying taxes, so I don’t want to hear any lame excuses of how this is a highly improbable situation. In fact, I plan to do this in the future once I’m retired and do what I call “Tax Gain Harvesting.” Your individual situation may vary. This is not tax advice.

Sample Household

Let’s go directly into an example of a household this could apply to. Imagine if you are married filing jointly and either you or your spouse works a part time job making ~$30,000. Perhaps you have this job to qualify for health insurance through your employer, which would be a very cheap way to cover two people. Next, let’s say you have a portfolio of $2,000,000 which is a common target in Financial Independence Retire Early circles. Some people consider this “FatFIRE.” I personally don’t think it is FatFIRE, more so medium, but let’s continue. At $2,000,000, you will generate around ~$80,000 of investment income at a 4% rate of return. You can have a higher return, you just won’t be able to realize all your gains if you want to pay $0 taxes.

0% Taxes for Long Term Capital Gains

For 2021, the 0% long term capital gains tax bracket for Married Filing Jointly is $0 to $80,800, meaning you can realize up to $80,800 of investment gains during 2021. Next, the standard deduction is 25,100 for Married Filing Jointly in 2021. Finally, we can add $12,000 to a traditional IRA since we have two people (note that not all of this amount can be deducted). The limit for IRAs is $6,000 per person. Because of the deductions from the IRA and the standard deduction, the ~$30,000 we made in ordinary income gets offset to $0. The $80,800 from our long term capital gains are taxed at 0%. Therefore we pay no taxes. Plug these numbers into tax software such as TurboTax if you would like to double check.

Traditional IRA or Roth IRA?

While this situation is all fine and dandy, if you are happy with the way we handled the IRA contribution, you failed the test. Instead, contribute $12,000 to a Roth IRA instead of a traditional IRA. In this case, we will want to make less ordinary income (drop down to $25,100). The reason why you want to do this is because Roth IRA contributions cannot be deducted since they are taxed before they are put into the account. You want to do a Roth IRA instead of traditional because you are in the lowest tax bracket possible. If you ever make more money in the future and get put in a higher tax bracket than 0%, this is highly highly beneficial. You typically want to put money into a Roth IRA if you are in a lower tax bracket than you would be in the future.

Anyways, we are getting too off topic. $80,800 in long term capital gains at 0% bracket + $25,100 in ordinary income which is offset by the standard decution = $105,900 in tax free money in 2021. Great if you are already retired, or maybe something to consider in the future. Keep in mind all the assumptions here have simple tax situations, but real life isn’t that simplified in most cases.

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