Are US Income Taxes Illegal

You’ve probably seen programs advertised that say they can show you how to not pay anything in income tax. Many of these programs make statements that the US income tax is illegal and as such it is unenforceable. I’ve heard people claim that they don’t pay any taxes and that the IRS leaves them alone because the IRS knows it is legal for them to not pay tax.

For a moment, lets consider the possibility that income tax is illegal and the law doesn’t require anyone to pay income tax. Even if that was true, you have to look at how it is enforced. The IRS can take you to court and if you lose you can go to jail. It doesn’t matter if the income tax is invalid on a technicality, the truth is you can go to jail for not paying your taxes–regardless of how right you think you are.

If you do go to court and end up in a jury trial, you are going to be judged by average citizens. Since most of the people in the US pay the taxes that they owe, it is unlikely that they are going to be sympathetic to your claim that you shouldn’t have to pay anything. So even if it were true that you shouldn’t have to pay taxes, you still face the very likely possibility of going to jail.

When it comes down to the law, taxes are legal. Some people say that they aren’t legal because at one point in time they weren’t. The federal government didn’t always have the power to tax individuals directly. It could tax the states, but it had to be done proportional to their population. The idea of taxing citizens directly wasn’t legal. However the 16th amendment to the Constitution, specifically addresses this.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

That makes it pretty clear that the government has the ability to tax individual income. If someone tells you otherwise, they are either making money by telling people what they want and paying taxes on that money or they are operating illegally and will potentially face very serious consequences in the future.

How to Make $82,400 Tax Free

The US taxation system is generally designed to tax everyone on money they make from any source inside or outside of the US. In some cases you can end up paying double tax on foreign source income because it is taxed in the foreign country and again in the US. However, there is a provision that will allow you to earn $80,000 without paying tax to the US government.

This provision is designed to minimize the tax burden on people who are no longer living in the US and make their income from a foreign source. It allows the exception if you are a resident of another country and have lived there for a full year or if you have spent at least 330 days of the last year outside of the USA.

Residency Test

Proving that you are a resident of a foreign country isn’t as simple as it seems it would be. There are many people who have homes outside of the US, but are still US residents. Basically you will need to do all the things you would normally do when establishing a residency in a foreign country. Getting a local drivers license, utility bills, property lease, etc. Just as important is how you handle your property in the US. If you move all of your belongings to your foreign residence it is easy to prove that you don’t reside in the US. Short of that, selling or renting out your home, placing your car in storage and other such actions will help establish your foreign location as your true residence.

Claiming to be a foreign residence, but keeping a house, vehicles, and other possessions easily accessible in the US will make it difficult to believe that you are truly a residence of another country.

Here is an example from the IRS.

For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Before you left, you distributed business cards showing your business and home addresses in London. You kept ownership of your home in Toledo but rented it to another family. You placed your car in storage. In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London.

Shortly after moving, you leased a car and you and your spouse got British driving licenses. Your entire family got library cards for the local public library. You and your spouse opened bank accounts with a London bank and secured consumer credit. You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Your abode is in London for the time you live there. You satisfy the tax home test in the foreign country.

Under the residence test, you are allowed to return to the US. It doesn’t appear that there is any certain amount of time that you are required to be outside the country. However, if you claim to live in Belize, but you spend 95% of your time in the US, you will likely fail the residency test.

Physical Presence Test

The other way to qualify for the $82,400 exclusion by calculating the number of days you intend to spend in the US each year. Even if you don’t establish a residency in a foreign country, but you are only in the US for 35 days in a given 12 month period, you will qualify for the exemption. This is particularly useful if you plan to travel around and not spend much time in any one place.

The IRS will also allow you to overlap 12 month periods to calculate the time you were out of the country. Here is one of their examples:

You work in New Zealand for a 20-month period from January 1, 2005, through August 31, 2006, except that you spend 28 days in February 2005 and 28 days in February 2006 on vacation in the United States. You are present in New Zealand 330 full days during each of the following two 12-month periods: January 1, 2005 - December 31, 2005, and September 1, 2005 - August 31, 2006. By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period.

Form 2555

The form to file for this exemption is Form 2555 from the IRS. Keep in mind that it only helps you out if you have income from a foreign source, so you have to be working for a foreign business. You can’t simply take your salary from a US company and claim an $82,400 exemption just because you’ve been traveling around the world. The IRS states that you don’t have to be in the foreign countries for employment–you can be traveling around on vacation.

It is important to note that Form 2555 only applies to earned income. Basically that refers to income you earn for doing work. It does not apply to income you earn for investments.

Form 2555 isn’t likely to help the average individual, however it is very worth keeping in mind as people spend more time traveling with an increasingly mobile workforce that crosses borders.