By: Sharon Yip, CPA
Many people wonder how the rich can get away without paying their taxes, legally speaking of course. But what they fail to realize is that most of the billionaires and giant corporations “avoiding” taxes still file annually and work with a CPA. They are able to pay $0 in taxes in some cases due to loopholes and organizing their financials in a certain way. But in most cases, money still comes out of their accounts straight to the IRS. The average person is not going to be able to use the same strategies that a major conglomerate might utilize. Most people will need to file regardless. But not everybody needs to pay their taxes, at least not until a limit is surpassed.
So, what amount of income is substantial enough to warrant the need to file your taxes? The answer is: It depends on multiple variables, such as whether someone else can claim you as a dependent, whether you are married or single, your age, and if you are blind. The major variable for tax liability is your gross income, which means any potentially taxable income for the given year (both within the United States of America and outside, as the U.S. is one of the few countries in the world that requires their citizens to report their worldwide income). Gross income includes items such as salary, investment income such as interest and dividend, miscellaneous income such as gross receipts from gambling, gaming or other hobby activities, cryptocurrency received from hard forks or airdrops, capital gains from crypto or stock trades, income reported on Schedule K-1 from a partnership or an S Corp, and business income reported on Schedule C, etc.
Following are the minimum gross income thresholds for tax for the 2020 tax year:
Single under age 65 $12,400
Single age 65 or older $14,050
Married filing jointly, both spouses under 65 $24,800
Married filing jointly, one spouse age 65 or older $26,100
Married filing jointly, both spouses 65 or older $27,400
Married filing separately, any age $5
Head of household under age 65 $18,650
Head of household age 65 or older $20,300
Qualifying widow(er) under age 65 $24,800
Qualifying widow(er) age 65 or older $26,100
There are some situations that require a tax filing even if you don’t meet the gross income threshold. Please consult your tax advisor if you are not sure whether you should file a tax return or not. It may be a good idea to always file your tax return though, because it can save you some trouble down the road. One big reason is if you don’t file, your statute of limitation never starts. That means the IRS can come after you anytime they want.
If you lost money from the stock market or cryptocurrency investments, it’s a good idea to file as you may be able to use your losses to offset all or part of your current year capital gain (up to $3,000 of net loss per year) and any remaining losses can be carried forward to offset future capital gains. If you don’t file a tax return, you cannot claim a loss. No capital loss carryback is allowed, but capital loss carryover can go on indefinitely, until the death of the taxpayer.
Capital gains are taxed differently based on whether it’s a short-term gain (for assets held one year or less) or a long-term gain (for assets held longer than a year). Short-term capital gains are taxed at ordinary tax rate, while long-term capital gain tax rate varies, and it could go as high as 37% in some cases. But with a bit of tax planning, that amount can drastically be reduced, and it could even be as low as $0. The main 3 variables that affect your eligibility for 0% tax rates are your filing status, annual income, and the amount of time the asset was kept before it was sold.
Following are the long-term capital gains tax rates for the 2020 tax year:
FILING STATUS 0% RATE 15% RATE 20% RATE
Single Up to $40,000 $40,001 – $441,450 Over $441,450
Married filing jointly Up to $80,000 $80,001 – $496,600 Over $496,600
Married filing separately Up to $40,000 $40,001 – $248,300 Over $248,300
Head of household Up to $53,600 $53,601 – $469,050 Over $469,050
(Source: Internal Revenue Service)
As you can see, if your income (including capital gains) is under a certain amount, you don’t have to pay taxes on your long-term capital gains.
If you do not have much income from sources other than crypto, there are some tax planning strategies you can utilize to achieve a zero-tax goal. For example, you can use loss harvesting strategy to realize losses for coins that you bought during the current year and are having a significant loss in value near year-end, and hold on to the coins that you bought a year or more before that are increasing or having a big chance of increasing in value. In the following year, you can sell the appreciated coins to get a long-term capital gain and use the capital loss carryover from the prior year to offset part of the current year capital gains and get your annual income down to a level that you don’t need to pay any taxes for your remaining capital gains. That is how you can legally avoid paying your crypto taxes!