Most people never grow accustomed to the big chunk of federal income tax withheld in each paycheck. The more you make, the more the IRS withholds.

As the senior tax specialist at Personal Asset , I often get the question: Is it possible to reduce your taxable income to result in a $0 tax bill?

Careful tax planning could significantly reduce your tax burden to almost nothing even if you have a fairly high income. Here’s how.

How much do Americans pay in taxes?

During the fiscal year 2021,¹ the IRS collected more than $4.1 trillion in gross taxes, processed more than 261 million tax returns and other forms, and issued more than $1.1 trillion in tax refunds (including $585.7 billion in Economic Impact Payments and Advance Child Tax Credits).

The IRS has historically collected the most total tax² from California, New York, and Texas; these states also had the largest total refunds issued.

Most of the tax burden fell on the highest income earners. According to the latest federal income tax data from the IRS,³ the top 50% of all taxpayers paid 97.1% of all individual income taxes, while the bottom 50% paid the remaining 2.9% in 2018.

The state of the tax code

Tax code is complicated. However, the basic framework is simple. Your tax rate gets progressively higher as your income increases. The complexity arises from the various types of income as well as deductions and credits available to taxpayers that plan carefully.

Another layer of complexity arises when these deductions and credits phase out as incomes increase. The tax system is so complex for many reasons, from individuals who take advantage of loopholes in the code (prompting the creation of further rules), to government-driven initiatives and incentives. And the sweeping tax code changes that resulted from President Donald Trump’s 2017 Tax Cuts and Job Act make things even more confusing.

How the Average American can reduce their taxable income and lower taxes

So, let’s get to the point: Can the average American pay no taxes? Indeed, some taxpayers, even those with investment income over $100,000, could pay zero tax. But regardless of your income or net worth, it’s financially prudent to take any available tax deductions and credits you qualify for.

John: 23-year-old recent college grad

In the first example we have John, a 23-year-old who wants to keep his tax bill at zero. John just finished college and recently started full-time employment at an entry level salary of $30,000. He managed to live frugally while in school and is willing to maintain the college student lifestyle for a few more years. Fortunately for him, he studied finance in college and knows the power of compounding investment returns. He knows that investment contributions made while he is in his twenties will grow for decades to come, thereby securing a safe retirement.

Since John has roommates that split the rent and utilities, John feels comfortable living on $1,300 per month total out of his $2,500 monthly paycheck. John participates in his employer’s 401(k) plan by contributing $1,000 per month. This leaves $200 from each paycheck to cover Social Security and Medicare tax withholding.

For tax purposes, what started out as a $30,000 salary becomes $18,000 in adjusted gross income after subtracting the $12,000 John contributes to his 401(k) during the year. For tax year 2022, an individual taxpayer with no dependents will owe $505 on $18,000 income. Since John funds his 401(k) account throughout the year, he is entitled to take the Retirement Savings Contributions Credit. John’s Retirement Savings Contributions Credit will be $505. This credit will reduce his tax bill to zero.

The Retirement Savings Contributions Credit, or Saver’s Credit, offers taxpayers a credit of 10%, 20% or 50% of contributions to retirement savings accounts such as a 401(k) or an IRA.

Here are the Adjusted Gross Income (AGI) limits for claiming the Saver’s Credit in for filing your taxes in 2022.

2022 Saver’s Credit

*Single, married filing separately, or qualifying widow(er)

The amount of the credit is limited to the total tax owed by the taxpayer. In John’s case, he qualifies to receive up to $1,000 for the Saver’s Credit. Since his tax bill without the Saver’s Credit is only $505, the Saver’s Credit is limited to $505. Unlike some credits (such as the Earned Income Credit and the Additional Child Tax Credit), the Saver’s Credit is not refundable if the credit exceeds the taxpayer’s tax liability.

John can keep his tax bill at zero even if he gets a raise. If he increases his 401(k) contributions by the amount of his raise each year, his adjusted gross income will remain at $18,000, and he will continue to receive the Retirement Savings Contributions Credit.

John’s tax bill: $0

The Smiths: married couple, 40 years old with two kids

The Smith family is our second example of a household that pays zero federal income tax. Mr. and Mrs. Smith are both 40 years old and they have two kids in elementary school. Together, the Smiths earn $104,300 per year from their full time jobs.

The Smiths put a strong emphasis on retirement savings by contributing the maximum to their 401(k)s ($20,500 each in 2022) and traditional IRAs ($6,000 each in 2022). In total, they contribute $53,000 to their retirement accounts.

Since the Smiths have two children in elementary school, they have to pay for after-school care during the school year and some child care during the summer months. The total child care costs amount to $5,000 per year. The Smiths contribute $5,000 to their childcare flexible spending account provided by Mrs. Smith’s employer, and this amount is taken out of her paycheck pre-tax.

Similarly, Mrs. Smith contributes $2,750 per year to her healthcare flexible spending account, which is also deducted from her paycheck pre-tax. With the family’s typical medical and dental expenses, they are certain to use the $2,750 each year.

After taking these deductions from their gross income, their $104,300 combined salaries are reduced to an adjusted gross income of $43,550. A married couple with two children will owe $1,765 income tax on $43,550 of adjusted gross income. The Smiths can take the child tax credit of $4,000 ($2,000 per kid). $1,565 of the credit is a non-refundable credit that offsets the income tax liability and they are also allowed to take $1,944 as a refundable credit.

Their tax credits totaling $1,765 completely offset the tax liability they would otherwise have on their $43,550 adjusted gross income. The Smiths will owe zero tax and receive a refundable tax credit. Even though the Smiths enjoy a six-figure gross income, they still manage to bring their federal income tax bill down to zero by taking advantage of several tax credits and deductions.

Mr. and Mrs. Smith’s tax bill: $0, and total tax refund of $2,435

The Jacksons: married couple, 55 years old, empty nesters

The Jackson family will serve as our third example of how ordinary households can avoid paying federal income tax. The Jacksons’ total annual salaries sum to $113,750.

Mr. and Mrs. Jackson raised two wonderful children and are now looking forward to retirement within five years. The two Jackson children have finished college and are no longer dependents of their 55-year-old parents. The Jacksons are also proud of recently paying off their 30-year mortgage on the house they bought when they were newlyweds.

With the kids out of the house and the house paid off, the Jacksons find themselves with more disposable income. Since Mr. and Mrs. Jackson are nearing retirement age, they want to put the disposable income to work for themselves by turbocharging their retirement savings.

The Jacksons are in luck because IRS rules allow taxpayers age 50 or over to make “catch up” contributions to their 401(k) plans and IRAs. An individual age 50 or over can make an additional $6,500 catch up contribution to their 401(k), and an additional $1,000 catch up contribution to their IRA in 2022.

This means taxpayers age 50 or over can contribute a total of $27,000 per year to a 401(k) and $7,000 to an IRA. Spouses age 50 or over are also entitled to make these catch up contributions. The Jacksons contribute the maximum (including catch up contributions) to their 401(k)s and their traditional IRAs, which amounts to $68,000 for 2022.

Mr. and Mrs. Jackson don’t have any significant health issues right now, but they want to ensure they have adequate savings to pay for healthcare expenses in retirement. Mr. Jackson contributes the maximum of $8,300 to his Health Savings Account (HSA) offered by his employer.

Most families can contribute a maximum of $7,300 to a health savings account. However, the catch-up provisions for taxpayers age 55 or over allow an additional $1,000 contribution for a total maximum contribution of $8,300. Amounts contributed to an HSA remain in the account year after year if they are not spent (in contrast to flexible spending accounts whose remaining balances are mostly forfeited at the end of the year).

The Jacksons have some investments in a brokerage account that they manage on their own. Mrs. Jackson enjoys overseeing the individual holdings and she “tax loss harvests” at least $3,000 per year from these taxable investments.

After deducting the 401(k) and IRA contributions, the health savings account contributions, and the capital loss deduction, the Jacksons manage to reduce their $113,750 earned income down to an adjusted gross income of $34,450!

For a married couple with no additional dependents, the tax liability on $34,450 in adjusted gross income (after the standard deduction) is $855. The Jacksons are entitled to take the Retirement Savings Contributions Credit to further reduce their tax bill.

At an adjusted gross income up to $34,450, married couples can take a credit of 50% of up to $4,000 of retirement contributions. This would allow the Jacksons a $2,000 tax credit. The credit is limited to the tax owed by the taxpayers, which is $855 for the Jacksons. The Jacksons take the $855 Retirement Savings Contributions Credit and reduce their tax bill to zero.

The Jackson’s total tax bill: $0

The Millers: 30-something married couple, 3 young children

The Millers, a couple in their 30s with three young children, will earn approximately $150,000 in 2022 between salaries and some moderate investment income.

In this table, their gross salaries are shown along with all the deductions from their salary for retirement savings, child care, flexible spending account, health savings account, health insurance, and dental insurance. After all the deductions, their $150,000 combined gross salaries are reduced to a net of $83,700 (almost a 56% reduction):

In this second table, the earned income and investment income is shown along with another series of deductions including the capital losses from tax-loss harvesting. Since the Millers have three children, they received $4,353 of child non-refundable tax credits. They also had $300 foreign tax withheld on their investment income, hereby generating a $300 foreign income tax credit. There was also a $1,647 refundable child tax credit.

Additionally, because their taxable income was $83,350, the 15% capital gains bracket, their qualified dividends were taxed at zero percent.

In this situation because of both the non-refundable and refundable Child Tax Credit, they were not only able to zero out their tax liability, they received a refund of $1,647.

How to lower taxable income

With some planning, it isn’t impossible to file a 1040 that shows zero tax liability. The four examples highlighted in this article show taxpayers at different stages of life who managed to significantly reduce their tax burden. Three of the example households reduced their tax bill to zero despite earning six-figure salaries.

How did these taxpayers reach a zero-dollar tax bill and how could you pay less in taxes? Consider:

• Contributing significant amounts to retirement savings plans
• Participating in employer sponsored savings accounts for child care and healthcare
• Paying attention to tax credits like the child tax credit and the retirement savings contributions credit
• Investing in a tax-efficient manner

Careful tax planning can potentially slash your tax bill, even if you have a fairly high income.