Every year, millions of Americans patiently wait for weeks to receive all of their necessary tax forms in the mail, dutifully gather them together and prepare their returns, and wistfully contemplate what they could have done with the dollars that went to Uncle Sam and their state governments. But not everyone is subject to this process; there are some groups of people in America who have been exempted from this process under our tax code. There are five main categories of taxpayers that are lucky enough to escape the tax man.
Personal Income Tax Guide
1. Not-for-Profit Organizations
Section 501(c)3 of the Internal Revenue Code dictates that any organization that qualifies to be classified under this section is exempt from paying income taxes of any kind. Qualifying organizations include religious, educational and humanitarian entities, such as churches, synagogues, universities, hospitals, the Red Cross, homeless shelters and other groups that seek to improve our society.
2. U.S. Citizens Working Abroad
If you live and work overseas, it is possible that you may not pay taxes to Uncle Sam on that income. In 2019, Americans can earn up to $105,000 working abroad before they would need to pay taxes. For 2020, this exclusion amount rises to $107,600. Expatriates receive additional benefits as well, such as the ability to exclude or deduct housing costs from their incomes. To qualify, the taxpayer must meet certain requirements. They must be bona fide resident of a foreign country, or be physically present in a foreign country for at least 330 full days in a year.
3. Low-Income Taxpayers
If you earn an income that does not exceed the standard deduction, not only do you not need to pay taxes, you don't need to file. For example, a married couple under the age of 65 would need to earn at least $24,400 before the IRS requires them to file their taxes. If both spouses are 65 or older, they do not need to file or pay taxes until their income exceeds $27,000.
Below are the filing requirements set by the IRS.
|Filing Status (2019)||Then file a return if your income was:|
|Single, under 65||$12,200 or more|
|Single, 65 or older||$13,850 or more|
|Married, filing jointly, both spouses under 65||$24,400 or more|
|Married, filing jointly, one spouse 65 or older||$25,700 or more|
|Married, filing jointly, both spouses 65 or older||$27,000 or more|
4. Taxpayers with Many Deductions
Some taxpayers are able to write off most or all of their taxable income with personal deductions. For example, someone who incurs a substantial medical bill may be able to claim this on Schedule A as an unreimbursed medical expense, which can drastically reduce their taxable income, possibly to the point where it falls below the taxable threshold.
5. Taxpayers with Many Dependents
Lower-income families with dependent children might not have to pay taxes because of the child tax credits they are entitled to claim. Take for example a married couple with three children. Depending on their income level, this couple could qualify for a maximum tax credit of $6,557 in 2019, which would offset their tax bill dollar for dollar. In 2020, the maximum allowable tax credit for this couple would be $6,660. The credits phase out once income thresholds are met. For our hypothetical couple with three children, the threshold is $55,952 in 2019 and $56,844 in 2020.
It is worth noting that taxpayers who don't have children can also qualify for a tax credit. A single-person with no children can claim a maximum credit of $529 in 2019 and $538 in 2020. The income thresholds for this taxpayer would be $15,570 in 2019 and $15,820 in 2020.
The Bottom Line
Although some taxpayers are automatically exempted from taxation by default, such as 501(c)3 organizations, it is also possible to exempt yourself from taxation by incurring substantial deductions and/or reducing your income accordingly. Although it is not always wise to let your tax tail wag your financial dog, reducing your income below the taxable threshold will always feel good, come tax time.
U.S. House of Representatives, Office of the Law Revision Counsel. "26 USC 501: Exemption From Tax on Corporations, Certain Trusts, etc." Accessed Feb. 1, 2020.
Internal Revenue Service. "Foreign Earned Income Exclusion." Accessed Feb. 1, 2020.
Internal Revenue Service. "Foreign Earned Income Exclusion - Physical Presence Test." Accessed Feb. 1, 2020.
Internal Revenue Service. "Foreign Housing Exclusion or Deduction." Accessed Feb. 1, 2020.
Internal Revenue Service. "Publication 501: Dependents, Standard Deduction, and Filing Information," Page 2. Accessed Feb. 1, 2020.
Internal Revenue Service. "Schedule A: Itemized Deductions." Accessed Feb. 1, 2020.
Internal Revenue Service. "Get Ready for Taxes: Important Things to Know About Tax Credits." Accessed Feb. 1, 2020.
Internal Revenue Service. "Earned Income Tax Credit Income Limits and Maximum Credit Amounts." Accessed Feb. 1, 2020.