How to Not Pay Your Taxes
Source: Hacker News
TL;DR
Defer U.S. taxes by reinvesting taxable income into the economy as business expenses, depreciating assets, and using leveraged investments. When investments appreciate or credit rates drop, pay yourself with refinanced cash.
Deferring Taxes by Reinvestment
The U.S. tax system encourages the creation of taxable wealth. Equity you already own is taxable; purchasing $10 k of AAPL stock does not create new wealth, but investing $10 k in an apple orchard does. To defer taxes, you must reinvest dollars in ways the IRS recognizes—typically by reporting legitimate business expenses.
The tax code rewards entrepreneurial activities that grow the economy. By deferring $1 now, the government foresees $11 in a decade, and the same logic scales up: $10 now for $110 later, $100 now for $1,100 later, and so on. If you are not genuinely reinvesting capital, you must pay the taxes owed.
Depreciation Schedules
Depreciation spreads the cost of a business asset over its useful life, reducing taxable income each year.
Example 1: Straight‑line depreciation over 10 years
| Year | Revenue | Depreciation | Taxable Income |
|---|---|---|---|
| 1 | $11 | $10 | $1 |
| 2 | $11 | $10 | $1 |
| … | … | … | … |
| 10 | $11 | $10 | $1 |
| Total | $110 | $100 | $10 |
Example 2: Front‑loaded depreciation (first year no depreciation)
| Year | Revenue | Depreciation | Taxable Income |
|---|---|---|---|
| 1 | $11 | $0 | $11 |
| 2 | $11 | $11 | $0 |
| … | … | … | … |
| 10 | $11 | $11 | $0 |
| Total | $110 | $100 | $11 |
Example 3: Aggressive front‑loading (large depreciation in year 1)
| Year | Revenue | Depreciation | Taxable Income |
|---|---|---|---|
| 1 | $11 | $100 | ‑$89 |
| 2 | $11 | $0 | $11 |
| … | … | … | … |
| 10 | $11 | $0 | $11 |
| Total | $110 | $100 | $99 |
Good accountants will adjust depreciation schedules to match other gains or losses, minimizing current taxable income.
Cost Segregation
Instead of depreciating a building over 27.5 or 39 years, a cost segregation study can reclassify components (e.g., carpeting, fixtures, landscaping, certain electrical systems) into shorter recovery periods of 5, 7, or 15 years. This can generate $200 k–$300 k of depreciation deductions in the first year for a $2 M property.
Leveraged Investments and Refinancing
Most investment capital is borrowed (e.g., SBA loans, commercial real‑estate loans). The government supplies cheap funds to banks, which then lend at higher rates. To keep the borrowed money tax‑free, many investors refinance: they replace an existing loan with a new one at a lower rate and pocket the cash difference. Since loan proceeds are not taxable income, this strategy does not increase your tax liability.
Disclaimer: Loans are not free, and refinancing can be complex.
Death and Estate Considerations
When a taxpayer dies, their personal tax obligations end. Heirs receive assets at fair market value, establishing a new cost basis for future depreciation. This “step‑up” in basis can effectively erase unrealized capital gains for the deceased.
Modern Monetary Theory Perspective
According to Modern Monetary Theory, taxes primarily serve to withdraw dollars from circulation; the government does not need the money in the first place. Nonetheless, the taxes you pay fund public infrastructure and services that continue to benefit society after you’re gone.