How the Average Family Can Pay No Federal Income Tax

This year I will pay no federal income tax. I think for the median family this is something that is entirely possible to do.  Although it does take a lot of effort that the average family may not be willing to do.  The median household in the US earns $51,000 a year. Here is a chart detailing how a family earning $45K, $51K, $55K, $60K, and even 65K a year can pay zero income tax.

Pay No Federal Income Taxes

Obviously the higher the income the disproportionately higher percentage of tax deferred savings needs to be done. While it is possible for incomes greater than $65K to hit zero income tax, it might not make sense to do so.  I think saving 10% – 20% of income should be a target that will provide most families with a decent retirement.   Just because you can hit zero income tax doesn’t mean it should be the only factor in determining how much money you save.  The major advantage to hitting zero federal income tax is being able to claim exempt on federal withholding, which can significantly increase cash flows, especially for people who earn a lot of money on short jobs.

The Breakdown

Adjustments to Income:

Here is where what you do matters. The main adjustments to income are 401K, IRA, and HSA savings.  Putting money into these vehicles tax deferred reduce your taxes by your tax rate. for someone in the 15% tax bracket, every $1,000 put into these vehicles reduces taxes by $150. In order for a family of four to pay zero income tax essentially every dollar earned above $50,250 needs to be put into savings.

The Standard Deduction and Exemption:

For the average family of four, taking the standard deduction subtracts $12,400 from income, while each family member gets an exemption of $3,950.  In total, this becomes $28,200 of income protected from income tax. Families with enough itemized deductions to exceed the standard deduction can reduce the amount of adjustments to income (401K, IRA, and HSA contributions) by the dollar amount of itemized deductions over the standard deduction.

Tax Credits:

The two major tax credits that I am using in this example are the child tax credit and the retirement savers tax credit.  The child tax credit provides a $1,000 tax credit per child. Since credits pay down income tax owed dollar for dollar they make a much larger change than deductions do.  $2,000 in tax credits exempts $18,150 of income at the 10% rate and $1,200 at the 15% rate, exempting $19,350 total from federal income tax.  The retirement savers tax credit for married couples with an AGI of between $39,000 and $59,000 provides a 10% tax credit for each person, up to a $2,000 contribution, resulting in a total tax credit of $400. At a 15% tax bracket, this credit exempts another $2,666 of earnings from income tax.

Other tax credits that can help median income families pay no income tax include the child and dependent care tax credit and the american opportunity tax credit.

Exact Median

For the family earning the exact median income or below, contributing the majority of their retirement savings to Roth accounts makes sense, because they will owe little to no federal income tax.  Only $750 needs to be contributed to a traditional account to keep the federal government out of a median families pocketbook.  For workers with a 401K match, contributing 5% to a plan, which usually will capture the full employer match will easily exceed this limit. With a $51,000 income the family would contribute $2,550 to a 401K, and then contribute $1,450 to a Roth IRA to take full advantage of the retirement savers tax credit. Any additional savings should be put in a Roth.

Paying Your Fair Share

I have been asked before, don’t I feel guilty for not paying my “fair share” of taxes?  I don’t feel guilty at all, and I wonder what the “fair share” amount is? I certainly do nothing illegal in order to avoid paying taxes, and I pay a lot in local property taxes, state income taxes, and social security and medicare taxes.  For several years I have paid thousands of dollars into federal income tax, and in 7 years when my oldest child no longer qualifies for the child tax credit, or if my income increases a bit more, I will be back to paying substantial federal income taxes.


Paying no federal income tax isn’t the easiest thing in the world to do, but with some planning can be achieved.   What other strategies do you use to reduce or eliminate your federal tax bill?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John is the author of the book For My Children's Children: A Practical Guide For Building Generational Wealth.

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