I have discovered a fool-proof strategy for beating the income tax, the Social Security tax and the Medicare tax: Lower your income.
Lowering your income is much easier than increasing your income. And it helps you avoid the nasty traps Congress sets to catch those foolish enough to earn too much money -- phasing-out deductions and exemptions, selectively repealing deductions with an alternative minimum tax, limiting the share of income you can put away in a 401k plan, and denying eligibility for tax-financed benefits such as student loans and scholarships. Lower your income and these problems disappear. To do this comfortably, it helps to have some savings. This game is best played by previously industrious but frugal people who are now approaching the ripe side of mature.
Like others in that group, much of my income comes from past savings and some from work. Income from work is the easiest to tax and measure. Since 1991, when Congress turned Medicare into another income redistribution scheme, every dollar we earn from working is now taxed to shore-up Medicare for a few more years. "Taxed Medicare Earnings" in your Social Security statement provide an excellent measure of earnings from work.
When I looked back at my own earnings, I saw that I had already started cutting my labor income by 26 percent in 1998-99 by greatly reducing extra writing and speaking. The resulting savings in taxes was much greater than 26 percent, of course, because marginal tax rates rise with income. Uncle Sam took the biggest hit, as planned.
My wife got this message even earlier, responding to the 1991 tax increase by retiring a dozen years short of normal. All her income would otherwise have been taxed at my steep rate. By not working she also stopped paying the increased Social Security tax, and later began collecting Social Security benefits at 62. Because I continue working, however, 85 percent of her modest benefits are taxed at my marginal tax rate. Another incentive to work less.
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