How I pay zero taxes (legally)

In this article I will outline how I execute my plan to pay zero taxes in my early retirement.

As most people know, in the USA, there are both Federal and State taxes so I’ll address them separately.

Federal Taxes:

There are two separate tax brackets. One is for Ordinary Income and the other is for Long Term Capital Gains (Short Term Capital Gains are taxed at Ordinary Income rates). For those that don’t know, LTCG means you’ve held your investment for over a year, and STCG is anything shorter.

Here’s the Ordinary Income tax brackets:

And here’s the LTCG tax brackets:

The way the IRS tax code works is it stacks LTCG on top of Ordinary Income.

Before I started making YouTube money, this analysis was very simple. I planned to make zero ordinary income, so we could ignore the first table, and only look at the second, which is what my equity sales would be subject to.

So my plan at the time was to simply sell equities in chunks (a few thousand dollars worth at a time when I need it), but make sure it’s FIFO sales, and make sure my LTCGs stay below the $47025 to stay within the 0% bracket.

What this means, is if I get closer to that number, I might start selling a position I’ve owned for over a year that went sideways or even lost money, in order to limit my capital gains but still be able to withdraw funds.

Since the YT channel took off, I now have to factor in how I’d like to pay zero taxes there too. Let’s say I make $20k/yr on YT/Patreon. I set up my YT channel as a Sole Proprietorship so that it classifies as a business. From here, I can take either the Standard Deduction of $15000/yr or itemize my deductions and see if it would save me more.

To keep the analysis simple, let’s say I take the standard deduction (which I most likely will), that reduces my taxable ordinary income to the remaining $5000.

Now to pay zero taxes on this $5000, I simply need to take business deductions. The reason I set up my YouTube channel as a Sole Proprietorship is purely for this reason. I am allowed to deduct flights, lodging, restaurants, equipment (gimbal, mics, etc) as business expenses since my channel is called Lit Nomad and traveling is a necessary business expense for the growth and brand of the channel. I should easily be able to cover the $5000 in deductions and can probably even go negative which I can roll over into future years.

So this effectively reduces my Ordinary Income to zero. Then the LTCG that would stack on top of it would start at zero, and I would just have to make sure to stay below $47025 per calendar year to stay in the zero tax bracket there as well.

State Taxes:

State taxes differ per state. California for example has notoriously high taxes, while Florida, Texas, and S Dakota are examples of states with zero taxes. Colorado was the state I most recently resided in, and they have a flat 4.40 percent individual income tax rate as well as LTCG tax rate. This would incur an additional 0.044 * $47025 = $2,069.10 that I would have to give away to Colorado per year if I chose to keep my formal residency there. This hardly seems fair since I plan to live abroad and never step foot in the state again. Texas and Florida seem like cool states for me to claim residency in, but like most states, they require for you to reside in their state for more than half of the calendar year in order to claim to be a resident there. The loophole here is only S Dakota.

S Dakota has a unique policy where if you stay in a hotel there for only one night every five years, you can be given residency in the state. For this reason, it is a popular state for digital nomads to gain residency in before they move abroad. I made a trip out of it, and visited Mount Rushmore while I was there. There are companies like DakotaPost that give you a mailbox there and they write you a Verification of Address Letter. So all you need to do is print out that letter, get a receipt from the hotel with your S Dakota address on it, bring two forms of ID (old Driver’s License and Passport) and bring it to their DMV, and they issue you a new license which officially makes you a resident.

I now pay zero state taxes for both ordinary income as well as long term capital gains and save $2069.10 per year.