Who Actually Doesn’t Get Taxed? – Avoid This Mistake + FAQs
- April 3, 2025
- 7 min read
Some individuals, organizations, and types of income in the U.S. legally pay zero tax under federal and state law.
The U.S. tax code is complex, with built-in exemptions, loopholes, and special rules that allow certain people and entities to owe no taxes at all.
This happens legally – by design of federal and state laws – not by cheating the system. In this in-depth guide, we’ll explore exactly who doesn’t get taxed, how they manage it under the law, and what it means for the rest of us.
🏦 Learn which people and groups pay $0 in taxes – and why they’re exempt
📜 Understand key tax terms & loopholes (from 501(c)(3) nonprofits to pass-through LLCs)
🗺️ See a state-by-state breakdown of tax-free situations across all 50 states
💡 Discover real-life examples and court cases that illustrate legal tax avoidance
⚖️ Weigh the pros and cons of using legal strategies to reduce your tax bill
Tax-Free in America: Who Pays $0 and Why (Overview)
Imagine not owing a single dollar to the IRS or your state tax authority. It sounds like a fantasy, but for some it’s reality – completely within the law. There are various categories of individuals and organizations in the United States that end up with a zero tax bill due to deliberate provisions in tax law.
Below is a quick overview of the main groups who often legally pay no taxes:
Low-Income Individuals and Families: Millions of Americans end up owing $0 in federal income tax because their income is below taxable thresholds or they qualify for credits that erase their tax liability. For example, a family of four with modest earnings might owe nothing after applying the standard deduction and Child Tax Credit.
Nonprofit Organizations and Churches: Entities organized for religious, charitable, scientific, or educational purposes – like churches, charities, and foundations – are generally tax-exempt. Under Section 501(c) of the Internal Revenue Code, these organizations pay no federal income tax on money related to their mission. A local church or the Red Cross, for instance, doesn’t pay taxes on donations it receives.
Certain Businesses and Investors: Some businesses use loopholes and incentives to zero out their taxes. Big corporations sometimes pay no federal corporate tax in profitable years by leveraging credits, deductions, and past losses. Likewise, savvy investors can structure their income (for example, by holding assets instead of selling) so they have little or no taxable income.
Specific Income Types: Not all money is taxed. Some forms of income are explicitly tax-free. Interest from municipal bonds, for example, is not taxed by the federal government. Gifts and inheritances generally aren’t considered taxable income to the recipient. Even certain overseas earnings can be excluded from U.S. taxes if conditions are met.
These are just highlights. Legally paying zero tax usually involves fitting into one of these categories (or a combination). It’s important to note that even when someone owes no income tax, they might still pay other taxes (like sales tax, property tax, or Social Security/Medicare payroll taxes).
Still, the ability to reduce income tax to nothing is a significant financial advantage and a point of contention in debates about tax fairness.
In the sections that follow, we’ll dig deeper into federal tax exemptions and loopholes, explore how state tax rules differ (including a 50-state breakdown), and provide examples, data, and FAQs.
Let’s start by understanding the federal side – who escapes IRS taxes and how.
Federal Tax Loopholes & Exemptions Explained
At the federal level, U.S. tax law provides a variety of ways that an individual or entity can end up with no tax due. Some are intentional features (like exemptions for nonprofits), while others are side effects of deductions or credits. Here we break down the main federal laws and loopholes that allow for legal tax-free status.
The 0% Club: Individuals Who Legally Pay No Income Tax
Millions of individuals pay no federal income tax each year. Contrary to popular belief, it’s often not because they’re doing anything sneaky – the tax code itself relieves them of liability. Key reasons include:
Income Below the Tax Threshold: The U.S. has a standard deduction that shelters a base amount of income from tax. In 2025, a married couple filing jointly might have over $27,000 of income with zero tax due, thanks to the standard deduction. If your total income is under the threshold (after deductions), you simply owe no tax. Many low-wage workers, part-time earners, or students fall into this category.
Tax Credits Wiping Out Tax Liability: Refundable tax credits can reduce your tax bill to zero (and even beyond, resulting in a refund). For example, the Earned Income Tax Credit (EITC) for low-income working families and the Child Tax Credit can eliminate any income tax owed. A working parent with low earnings and two children might get a refund from the government despite paying no income tax, due to these credits.
Seniors and Retirees: A significant number of retirees owe no federal tax. Social Security benefits are tax-free for lower-income seniors (if Social Security is your only income, you typically pay no tax on it). Additionally, those over 65 get a higher standard deduction. Many elderly Americans end up with no tax liability because their income sources (like Social Security, small pensions, or savings withdrawals within limits) aren’t enough to trigger taxes.
Overseas Americans (Foreign Earned Income Exclusion): U.S. citizens who live and work abroad can exclude a certain amount of foreign-earned income from U.S. taxation (over $100,000 annually, indexed to inflation). If an American expat’s salary is below that exclusion limit and they meet IRS requirements, they may owe no U.S. income tax on those earnings. Essentially, they get a tax-free pass on foreign income up to a threshold.
Investors with No Realized Gains: Some wealthy individuals appear to pay zero tax because they strategically have no “realized” income. They might hold onto assets (stocks, real estate, etc.) that are growing in value but not sell them – since unrealized gains aren’t taxed. They may also borrow against their wealth to fund their lifestyle, rather than earn a salary. By not taking an official income, they legally owe no income tax in that year. This “buy, borrow, die” strategy (holding assets, borrowing against them, and then having the slate wiped clean at death by the step-up in basis) has allowed some billionaires to report zero taxable income in certain years.
Tax-Exempt Organizations: Nonprofits, Churches, and More
Under federal law, certain organizations are exempt from income tax because of the public benefit they provide. The IRS recognizes dozens of types of tax-exempt entities under Section 501(c) of the Internal Revenue Code. Here are the major ones:
Charitable Organizations (501(c)(3)): This category includes charities, religious organizations (churches, synagogues, mosques), educational institutions, hospitals, and foundations. They must operate for approved purposes (charitable, religious, scientific, literary, etc.) and cannot distribute profits to owners (no private benefit). In return for serving the public good, they pay no federal income tax on donations, grants, and other income related to their mission. For instance, the Salvation Army or a local food bank doesn’t pay taxes on the funds it raises or the goods it receives to help others.
Social Welfare and Civic Organizations (501(c)(4), (c)(7), etc.): Groups like social welfare organizations, fraternal societies, veterans’ organizations, or social clubs also enjoy tax-exempt status, though with different rules and limitations. A homeowners’ association or a volunteer firefighters’ organization might qualify for exemption. They typically pay no tax on member dues or donations used for their exempt purpose.
Churches and Religious Institutions: Churches deserve special mention because they are automatically considered tax-exempt (501(c)(3)) without even needing to file an application with the IRS. They also enjoy additional privileges – for example, churches are not required to file annual information returns (Form 990) that other nonprofits must file. This means religious congregations can operate tax-free almost invisibly. Tithes, offerings, and donations given to a church are not taxed. (However, if a church runs an unrelated business – say it owns a gift shop – that unrelated income can be taxable.)
Foundations and Trusts for Charity: Private foundations (often funded by a single wealthy family or corporation) are also tax-exempt, though they must pay out a minimum amount each year for charitable purposes. Similarly, certain trusts can be structured to be tax-exempt, especially if they are irrevocably dedicated to charitable causes. A charitable remainder trust, for example, can sell assets without immediate tax and eventually give remaining assets to charity, enjoying tax benefits along the way.
It’s worth noting that tax-exempt organizations do have to follow the rules closely. If a nonprofit strays from its mission or engages in political campaign activity, it could jeopardize its status.
A famous case in 1983 (Bob Jones University v. United States) confirmed that organizations violating fundamental public policy (in that case, by practicing racial discrimination) can lose their tax exemption. But as long as they comply, these organizations pay no federal income tax on their core activities.
Pass-Through Businesses: LLCs, S-Corps, and Partnerships
Business entities in the U.S. come in different flavors, and some don’t pay tax themselves at all. Pass-through entities are businesses where the profits “pass through” to the owners’ personal tax returns. The business itself doesn’t pay corporate income tax:
LLCs and Partnerships: A standard Limited Liability Company (LLC) with one owner is disregarded as a separate entity for federal tax – it’s essentially invisible to the IRS. If there are multiple owners (as in a partnership or multi-member LLC), the IRS treats it as a partnership. In both cases, the LLC itself pays no income tax.
Instead, the owners report the business’s profits on their own returns. If the business had a lot of expenses or losses, an owner could end up with no taxable income from it – thus no tax due.
S Corporations: S-Corps are another type of pass-through. Like LLCs, an S-Corporation does not pay federal corporate tax. Profits or losses flow to shareholders’ individual returns. Many small and mid-sized companies elect S-Corp status to avoid the “double taxation” of a regular C-corporation. If an S-Corp’s deductions (say, for salaries paid or investments in equipment) equal or exceed its income, neither the company nor its owners owe income tax on that business for the year.
Real Estate Investment (REITs) and MLPs: The tax code also allows special business entities like Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs) that do not pay corporate tax as long as they distribute most of their income to shareholders. Those distributions are then taxed at the individual level (often at favorable rates or sometimes not at all if offset by depreciation). This means the entity itself is effectively tax-free.
When Pass-Through Means No Tax: The key point is that these structures can avoid entity-level tax. However, the income usually ends up taxed on someone’s 1040 individual return. The exception is if the owners themselves have offsets – for example, if an LLC owner has personal deductions or losses that cancel out the passed-through income, then effectively neither the business nor the individual pays tax on that money.
One common misconception is that forming an LLC or corporation automatically gives you a tax loophole. In reality, while these structures can prevent double taxation, the profits generally still face tax on the back end (except when circumstances like losses or credits erase it). Still, in any given year, it’s possible for a savvy business owner to pay $0 tax if they play their cards right within the legal framework.
Types of Income the IRS Can’t Touch (Legally)
Not everything that puts money in your pocket counts as taxable income. The IRS defines “gross income” broadly, but the tax code carves out certain exclusions. Here are some common types of income that are not taxed by the federal government:
Municipal Bond Interest: Interest earned from municipal bonds (bonds issued by state and local governments) is tax-free at the federal level. For example, if you buy bonds issued by your state to fund schools or infrastructure, the interest payments come to you free of federal income tax. (Bonus: if you buy bonds issued by your home state, that interest is often tax-free at the state level too.)
Gifts and Inheritances: If someone gives you money or property, you as the recipient do not pay income tax on that gift. Received an inheritance from a relative’s estate? The inheritance itself isn’t counted as income. (Large gifts or estates might trigger separate gift or estate taxes for the giver’s estate, but the person receiving the gift or inheritance pays no income tax on it.)
Life Insurance Payouts: A lump sum paid out from a life insurance policy when someone dies is generally not taxable income to the beneficiary. Millions of dollars can transfer tax-free this way. This is one reason life insurance is often used in estate planning – the heirs get money without a tax hit.
Qualified Roth IRA Withdrawals: Money taken out from a Roth IRA in retirement is tax-free, as long as the account rules are followed. While contributions to a Roth are made with after-tax money, all the growth and withdrawals come out completely tax-free. Someone who has saved exclusively in a Roth IRA could have a healthy tax-free income in retirement.
Certain Disability Benefits and Welfare Payments: Payments like worker’s compensation for job injuries, many disability insurance payouts (if you paid the premiums yourself), welfare benefits, and Supplemental Security Income (SSI) are not taxable. These are safety net benefits that the tax law excludes from taxation so that recipients get the full benefit.
Scholarships (for Education): Scholarship and grant money used for tuition and required educational expenses is not taxed. A college student whose tuition is covered by scholarships doesn’t pay tax on that benefit. (If the scholarship covers things like room and board, that portion could be taxable, but core education costs are tax-free.)
This is not an exhaustive list, but it shows how certain streams of money are intentionally kept tax-free. By focusing income in these categories, one could legally avoid taxes. For instance, wealthy individuals often invest in muni bonds to get tax-free interest, or use strategies like the Roth IRA to make sure some of their income won’t be taxed in the future.
Now that we’ve covered the federal landscape of who isn’t taxed and why, let’s turn to state taxes. State tax laws add another layer of nuance – some states have no income tax at all, while others offer unique breaks that can lead to a zero tax bill for some residents.
Avoiding Pitfalls: Common Mistakes in Pursuing Tax-Free Status
While it’s legal to minimize your taxes, there are pitfalls and misconceptions that can trip up well-meaning taxpayers. Not understanding the rules can lead to trouble, ranging from lost money to penalties. Here are some common mistakes to avoid when trying to take advantage of tax exemptions or loopholes:
Confusing Tax Avoidance with Tax Evasion: Tax avoidance means using legal methods to reduce your taxes (the focus of this article). Tax evasion means breaking the law to not pay taxes (like hiding income or falsifying records). It’s a critical distinction. Some people mistakenly think that if they don’t want to pay taxes, they can just choose not to – that’s evasion and it’s illegal. Always ensure any strategy you use is explicitly allowed by law or IRS regulations. If it’s not, you could face hefty fines or even criminal charges.
Misusing Loopholes Illegitimately: Many provisions have specific qualifications. A common mistake is stretching a tax break beyond its intent. For instance, declaring personal expenses as business expenses to wipe out income is not legal and can be disallowed in an audit. Or someone might try to funnel their salary through a fake “church” they set up to claim tax-exempt status – a scheme the IRS would see through. Abusing a loophole can invalidate it and draw penalties.
Ignoring Filing Requirements: Even if you owe zero tax, you might still need to file a return or forms. Nonprofit organizations must file an annual Form 990 (unless they’re a church) – failing to file for three years results in losing tax-exempt status. Similarly, individuals with low income but who got health insurance subsidies or other credits might need to file to reconcile those benefits, even if no tax is due. One mistake is assuming “no tax owed means no paperwork.” Always check the filing requirements.
Forgetting Other Taxes: Some people fixate on income tax and forget about other liabilities. You might have zero income tax but still owe payroll taxes (Social Security and Medicare) on any wages, or self-employment tax if you earned income from freelancing or a business. Likewise, avoiding federal tax doesn’t mean you avoid state taxes unless you’ve planned for those too. Ensure you consider the full tax picture – federal, state, and local. A classic mistake is moving to a no-income-tax state (like Florida or Texas) but not realizing property taxes and sales taxes might be higher, or that you still owe federal taxes.
Believing Tax Myths: The internet is rife with tax myths and bad advice – like the infamous “straw man” theory or claims that the IRS has no authority. Every year, some taxpayers fall for schemes claiming they don’t have to pay taxes because of a misreading of the law. Courts have repeatedly rejected these arguments. Don’t mistake fringe theories for legitimate loopholes. If something sounds too good (like a secret law that lets you opt out of taxes), it’s almost certainly bogus.
Remember: Stay on the right side of the law. The tax code’s legal loopholes are complex, and mistakes can cost you. It’s wise to consult a tax professional when in doubt. They can help ensure you’re leveraging legitimate breaks (like deductions, credits, or entity structures) correctly and not doing something that will backfire.
Key Tax Terms and Concepts Defined
To navigate the world of legal tax avoidance, you need to understand some fundamental tax terms. Let’s decode a few key concepts that we’ve been discussing, in plain English:
Tax Exemption: A provision that frees certain income or organizations from taxation. If you’re “tax-exempt,” it means you don’t have to pay tax on specific money. For example, charities are tax-exempt entities, and municipal bond interest is tax-exempt income.
Deduction vs. Credit: A deduction reduces your taxable income (before you calculate tax). A credit reduces your tax bill directly, dollar for dollar. Credits are generally more powerful. For instance, a $1,000 deduction might save you $220 in tax (if you’re in a 22% tax bracket), whereas a $1,000 tax credit saves you a full $1,000 in tax.
Loophole: An informal term for a provision or gap in the law that allows people to reduce their taxes in a way lawmakers might not have anticipated. It’s basically a tax trick that’s legal. For example, the ability for wealthy investors to borrow against assets instead of selling is sometimes called a loophole because it sidesteps capital gains tax.
Pass-Through Entity: A business structure (like an LLC, partnership, or S-Corp) that doesn’t pay corporate income tax. Instead, profits pass through to the owners’ personal taxes. This avoids the double taxation that C-Corps face. Pass-through = business not taxed on its own.
Tax Avoidance vs. Tax Evasion: Tax avoidance is legal and encouraged by the system (like claiming deductions, using exemptions). Tax evasion is illegal (like underreporting income or not filing). In short: avoidance = smart and legal reduction; evasion = illegal cheating.
IRS (Internal Revenue Service): The U.S. federal agency that collects taxes and enforces tax laws. They administer the Internal Revenue Code. If you’re claiming a special tax status or credit, the IRS is the body that might review or audit it. Knowing IRS rules and guidelines is crucial for any tax avoidance strategy.
501(c)(3), 501(c)(4), etc.: These refer to sections of the Internal Revenue Code defining types of tax-exempt organizations. 501(c)(3) is the most common (charities and religious orgs), 501(c)(4) are social welfare groups (they can lobby more, but donations to them aren’t tax-deductible to donors), and there are others up to (c)(19) for veterans’ groups, etc. When someone says “501c3,” they mean a nonprofit that doesn’t pay taxes and can receive tax-deductible contributions.
Trust (in a tax context): A legal arrangement where one party holds assets for another’s benefit. Trusts can be taxable or not. For example, a revocable living trust doesn’t save income taxes (the grantor still pays through their own return), but a charitable trust can have tax-exempt features. Trusts are often used for estate planning to minimize estate or gift taxes.
Unrelated Business Income (UBI): Even tax-exempt entities can have taxable income if they earn money outside their tax-exempt purpose. This is called unrelated business income. For example, if a charity runs a regular coffee shop open to the public, the profits from that might be taxable. Nonprofits must be careful to separate this out and pay taxes on it or risk their status.
Understanding these terms helps make sense of how certain people and organizations manage to pay no tax. With this foundation, let’s move on to some concrete illustrations of tax-free scenarios, and then examine how state taxes come into play.
Real-World Examples: How People and Companies Legally Pay $0 Tax
Nothing illustrates tax laws better than real examples. Let’s look at a few scenarios – some everyday, some extreme – that show how different folks end up with zero tax bills. The following table presents several situations side by side with the reason no tax is owed:
| Scenario | Why No Tax is Owed |
|---|---|
| Family of four with modest income – A couple earning $30,000 with two children. | After the standard deduction, their taxable income is near $0. Then the Child Tax Credit and Earned Income Credit wipe out any remaining tax. They legally owe $0 (and may get a refund). |
| Retiree living on Social Security – A single senior receiving $20,000 in Social Security benefits and little else. | Social Security benefits are not taxed at that income level. With no significant other income, the senior’s taxable income is zero. No federal tax due, and likely no state tax either. |
| Mega-corporation with clever accounting – A large company reports $100 million in profit on its financial books but uses tax breaks. | By claiming huge bonus depreciation on equipment, R&D tax credits, and carrying forward past losses, its taxable income drops to zero. The IRS sees no profit to tax. The company pays $0 in corporate income tax for that year. |
| Wealthy investor, no salary – An entrepreneur worth billions who takes no official salary. | He lives off loans and stock that doesn’t pay dividends. With no wages and no sold assets, his taxable income is effectively zero. Under current law, no income tax applies (though his wealth grows). |
| Local church and charity – A church receives $500,000 in tithes and donations; a charity raises $2 million in grants. | As 501(c)(3) nonprofit organizations, they pay no tax on this income. It’s all used for their religious and charitable activities. Neither the church nor the charity owes any income tax on funds used for their mission. |
These examples are simplified, but they reflect real phenomena. In recent years, news reports have highlighted how dozens of profitable Fortune 500 companies paid zero federal income tax due to perfectly legal credits and deductions. Similarly, it’s estimated that roughly 40% of U.S. households paid no federal income tax in a recent year – mostly low-income families or retirees using available exclusions and credits.
The billionaire example draws attention to how the ultra-wealthy can plan their finances. By avoiding “realized” income, they might pay little-to-no tax relative to their wealth. This is legal, though it raises debate. And, of course, nonprofits like churches are explicitly given a pass on taxation as long as they stick to charitable/religious purposes.
Now, let’s delve into some legal battles that have tested these tax rules, as well as data on how many people and companies actually pay nothing.
Tax Loopholes in Court: Notable Legal Cases
Tax laws and exemptions occasionally end up in court, especially when there’s a challenge or an abuse. Here are a few notable cases and rulings that shed light on the boundaries of legal tax avoidance:
Walz v. Tax Commission of New York (1970): This U.S. Supreme Court case upheld property tax exemptions for churches. A New York property owner challenged that churches not paying property tax was effectively government support of religion. The Court disagreed, finding that giving churches a tax break was constitutional – it wasn’t about advancing religion, but about not entangling church and state. This case affirmed that religious organizations could remain tax-exempt without violating the First Amendment.
Bob Jones University v. United States (1983): The Supreme Court ruled that the IRS could revoke the tax-exempt status of organizations that violate fundamental public policy. Bob Jones University had racially discriminatory policies at the time, and the IRS withdrew its 501(c)(3) status. The Court backed the IRS, holding that racial discrimination in education violated a fundamental national policy, and thus the university could no longer be tax-exempt. The lesson: tax-exempt status is a privilege, and if misused, it can be lost.
Cheek v. United States (1991): This case wasn’t about a loophole per se, but about a common tax mistake – the defendant, John Cheek, believed he was not legally obligated to pay income taxes, influenced by tax protestor arguments. He willfully didn’t file returns. The Supreme Court held that a genuine belief arising from misunderstanding the law could be considered by a jury in determining willfulness (an element of tax evasion crimes), but they also made clear that simply disagreeing with the tax law or claiming it’s unconstitutional is not a valid defense. Cheek was retried and ultimately convicted. The case underscores that you can’t just opt out of taxes due to mistaken beliefs; the law will hold you accountable if you knowingly evade taxes.
Gaylor v. Mnuchin (7th Cir. 2019): In this more recent case, a federal appeals court upheld the longstanding housing allowance tax break for clergy. Under the tax code, ordained ministers can receive a housing allowance from their church that’s excluded from taxable income. The Freedom From Religion Foundation challenged this as an unfair preference for religion. The Seventh Circuit Court of Appeals found the allowance constitutional, citing historical practice and the idea that it avoids government entanglement with religion (somewhat akin to the logic in Walz). So, clergy continue to enjoy a unique tax-free perk on their housing.
Corporate Tax Shelters and Substance Over Form: There isn’t a single case name here, but over years courts have struck down abusive corporate tax shelters using doctrines like “substance over form” and the “economic substance doctrine.” For instance, if a company undertakes a complex transaction that technically fits a loophole but has no real business purpose other than avoiding tax, courts (and the IRS) can invalidate the tax benefits. One classic case is Gregory v. Helvering (1935), an old Supreme Court case that set the precedent: even if you follow the literal words of the law, if you’re just doing a sham transaction to dodge taxes without economic substance, it won’t fly. This principle has been used time and again to clamp down on overly aggressive tax avoidance schemes that cross into abuse.
These cases collectively show that while there are legal ways to avoid taxes, there are limits. The IRS and courts will step in if someone tries to stretch a loophole beyond its intent or use a tax-exempt status in bad faith. On the flip side, when Congress clearly grants a tax break (like the clergy housing allowance or nonprofit exemptions), the courts often uphold those as long as they don’t violate other laws.
By the Numbers: Data on Americans Who Pay No Tax
Just how many people and organizations pay no tax? Let’s look at some data and evidence that give perspective on the scope of legal tax avoidance in the U.S.:
Households with Zero Federal Income Tax: In recent years, a sizable fraction of American households have owed nothing in federal income tax. For example, for tax year 2022, roughly 40% of U.S. households (around 72 million out of ~180 million) paid zero federal income tax. This was actually down from about 60% in 2020, a year when pandemic stimulus and economic disruptions led to many temporarily paying no taxes. Typically, in non-recession times, around 40-45% of households owe no federal income tax, primarily due to low incomes or tax credits. This doesn’t mean they pay no taxes at all (most still pay payroll taxes, sales taxes, etc.), but it highlights that nearly half of Americans can end up with a $0 federal income tax bill.
Tax-Exempt Organizations Count: The IRS reports that there are almost 2 million tax-exempt organizations in the country. About 1.5 million of these are charities, churches, and other 501(c)(3) groups. The remainder includes tens of thousands of social welfare groups, business leagues, social clubs, and more. All of these entities legally pay no federal income tax on their operations (besides certain cases of unrelated business income). The nonprofit sector has grown steadily over the decades, indicating significant activity happening completely outside the tax system in terms of income tax.
Big Corporations Paying $0: Each year, watchdog groups analyze corporate filings and find that dozens of large corporations pay no federal corporate income tax. For instance, at least 55 of the Fortune 500 companies paid zero federal corporate tax in 2020 despite being profitable. Companies like Amazon, Netflix, and General Motors have all had years with zero tax due to using legal breaks (depreciation, credits, etc.). In 2018, the number was even higher – one report found 91 big companies that paid nothing that year. These aren’t tax cheats; they’re simply making use of incentives and rules Congress put in place, such as bonus depreciation (which let companies write off investments quickly) and tax credits for activities like research or clean energy.
Wealth Concentration and Tax: A controversial study using leaked IRS data (released by ProPublica in 2021) showed that some ultra-wealthy individuals paid little to no income tax relative to their growing net worth. In some specific years, billionaires like Jeff Bezos, Elon Musk, and others had zero federal income tax liability. They accomplished this by having no taxable income – no salary, no stock sales – even as their wealth grew from stock gains. While this is a small number of individuals, it dramatizes how the structure of the tax system (taxing income, not unrealized wealth) allows for legally paying nothing, even by some of the richest people on the planet, in certain years.
Estate Tax Rarity: Most Americans leave some inheritance, but virtually 99.9% of estates pay no estate tax because of how high the exemption is (over $12 million per person as of mid-2020s). That means only the ultra-rich estates owe federal estate tax. The rest pass on wealth tax-free at death. For the inheritors, that wealth transfer isn’t income taxable either. This is another angle: not only income during life, but also transfers at death are often tax-free for the vast majority of people.
State Tax Variations: On the state side, data shows that in states with no income tax, obviously 0% of residents pay state income tax. But even in high-tax states, many filers end up with no state tax bill thanks to exemptions and credits. For example, California has high tax rates, yet in a recent year roughly 34% of California tax filers had no net state income tax after deductions and credits (often due to lower income or family credits). The pattern is similar: lower-income residents often are off the hook for state taxes, just as they are for federal.
These numbers paint a picture of a tax system where a large number of participants – from modest-income families to giant corporations – often legitimately have no tax liability. It’s by design to some extent: progressive tax policy aims to relieve the burden on those less able to pay, and economic policy provides breaks to spur investment or charity. However, it’s also clear that those with savvy accountants can join the zero-tax club too.
Now, having seen who and how many pay no tax federally, let’s compare what tax-exempt folks enjoy versus their taxable counterparts, and then examine how things vary across all 50 states.
Pros and Cons of Legal Tax Loopholes
For those considering aggressive tax planning or simply curious about the implications, it’s useful to weigh the advantages and disadvantages of the strategies that result in a zero tax bill. Here’s a quick look at some pros and cons of using legal tax loopholes and exemptions:
| Pros of Paying Zero Tax | Cons of Relying on Loopholes |
|---|---|
| More money in your pocket: Keeping what you earn or receive means you have more cash to save, invest, or spend. This can help you build wealth faster. | Complex planning required: Achieving a zero tax bill often isn’t simple. It may require sophisticated planning, accountants or lawyers, and sometimes lifestyle choices (like moving abroad or not selling assets). |
| Encourages certain behaviors: Tax exemptions exist to promote things like charity, investment, or home ownership. If you take advantage, you’re likely doing socially encouraged activities (and getting rewarded via no taxes). | Risk of changes or audits: Laws can change, closing loopholes (what works today might not tomorrow). Also, pushing the envelope could attract IRS scrutiny. An audit, even if you’re legal, is time-consuming and stressful. |
| Legal and peace of mind: Using legal provisions means you’re not at risk of fines or jail. You can sleep easier knowing what you’re doing is allowed by the IRS. | Perception and fairness: There can be a public relations or ethical downside. For example, if you’re a profitable business or wealthy individual paying no tax, it might attract negative attention or feel unfair to others. |
| Capital retention: Especially for businesses and investors, paying less tax leaves more capital available to reinvest in growth, create jobs, or donate philanthropically. | Unequal benefits: Not everyone can benefit equally. Many loopholes are more accessible to the wealthy or corporations with resources. Depending solely on loopholes could widen inequality and spark policy backlash. |
In personal terms: If you’re able to pay zero tax, you’ll certainly enjoy the financial boost. But it often requires jumping through hoops or structuring your life in particular ways. And while it’s great to save money, one should be aware that tax laws evolve – what’s perfectly legal today (say, a generous credit or exclusion) might be curtailed in the future if it’s seen as too generous or unfair.
For society, the pros and cons translate to policy debates. The pros are that tax exemptions can encourage positive activities and ease burdens; the cons are that they shrink the tax base and can be seen as loopholes that others have to subsidize through higher rates.
Tax-Exempt vs. Taxable: Comparing Apples to Apples
To better understand what it means to be tax-exempt, let’s compare side by side a few scenarios of tax-exempt entities or income versus their taxable equivalents. This highlights the differences in how they operate and why one pays no tax while the other does.
| Tax-Exempt Scenario | Taxable Scenario |
|---|---|
| Charity vs. Business: A nonprofit charity (e.g., a food bank) earns $500,000 in donations and grants and pays no tax on that income, using it all for its programs. | Regular Business: A for-profit company earns $500,000 in revenue. After expenses, any profit is subject to corporate income tax (or personal tax if it’s a small pass-through business). The business must pay taxes on its earnings. |
| Municipal Bond vs. Corporate Bond: You invest $10,000 in a city municipal bond paying 5% interest. You receive $500 interest annually tax-free (federally). | Taxable Bond: You invest $10,000 in a corporate bond paying 5%. You get $500 interest, but it’s taxable income. If you’re in the 24% tax bracket, you owe $120 of that to the IRS. |
| Roth IRA Withdrawal vs. Traditional IRA Withdrawal: At age 65, Jane pulls $40,000 from her Roth IRA – none of it is taxed, because Roth withdrawals are tax-free by law. | Taxable Retirement Withdrawal: John pulls $40,000 from his 401(k). That counts as taxable income to him. He might owe a chunk of it in income tax, depending on his bracket, because it’s treated as regular income. |
| Pass-Through LLC vs. C-Corp: Alice’s small business is an LLC that made $0 profit after expenses (so nothing passes to her taxable income). The LLC itself owes no tax. | C-Corporation: Bob’s small C-Corp made $0 profit after expenses, so it owes no tax either. (If it had profits, it would pay corporate tax.) In this case, both pay none, but if profit existed, Bob’s C-Corp would pay taxes first, then Bob again on dividends – two layers of tax – whereas Alice’s pass-through would only tax her once if she had profit. |
| Estate under $12 million vs. Estate over $12 million: The Smith estate is worth $5 million; no estate tax applies (under the exemption), so heirs get it all tax-free at the federal level. | Taxable Estate: The Jones estate is $20 million. Roughly $8 million is above the exemption; that portion faces federal estate tax up to 40%. The IRS could take around $3.2 million. The heirs of Jones pay tax, Smith’s do not. |
These comparisons show how being on the tax-exempt side of the fence can result in dramatically different outcomes. Whether it’s an organization not having to carve out part of its funds for the IRS, or an investor receiving interest with zero tax, the differences add up. Often, the tax-free path has some restrictions (like a charity can’t distribute profits to owners, or Roth IRA has contribution limits and rules), which is the trade-off for the privilege of not being taxed.
Now, let’s shift from the federal perspective to the state-by-state panorama. State taxes can vary wildly – some Americans live in places where they pay no income tax or enjoy unique exemptions that others don’t. The next section provides a 50-state map of who doesn’t get taxed and where.
50-State Breakdown: Who Pays Zero Tax and Where
Every U.S. state has its own tax laws, which means the experience of “paying no tax” can depend on where you live or operate. Some states have no income tax at all, making it easier for residents to owe nothing. Other states give special tax breaks to certain groups (like retirees, veterans, or farmers), which can result in zero state tax for those folks even if there’s a general income tax.
Below is a state-by-state overview highlighting key tax nuances that affect who doesn’t pay taxes in each state. This focuses on state income taxes (since that’s the major tax that varies by state) and notes any broad exemptions. Remember, even in states with no income tax, residents still pay other taxes (sales, property, etc.), but our focus here is on income tax liability.
| State | Tax-Free Situations & Exemptions |
|---|---|
| Alabama | Has a state income tax, but exempts Social Security benefits and many pensions from taxation. Low-income residents owe no tax thanks to personal exemptions and credits. Nonprofits are exempt from Alabama income tax. |
| Alaska | No state income tax and no state sales tax. Residents pay $0 in state income tax by default. (Alaska even gives residents an annual oil dividend, which is not taxed by the state.) |
| Arizona | State income tax applies, but credits (like the family tax credit) and exemptions can reduce liability to zero for low earners. Social Security is not taxed. Charitable organizations are exempt from state tax. |
| Arkansas | Has an income tax, but offers an array of exemptions: Social Security and military retirement pay are fully exempt. Low-income individuals may owe no state tax after the standard deduction and credits. |
| California | High income tax rates, yet many low-income families owe no state tax due to credits like CalEITC (California Earned Income Tax Credit) and a young child tax credit. Social Security is exempt. Nonprofits pay no California income tax on their exempt activities. |
| Colorado | Flat 4.4% income tax, but has a sizable standard deduction and credits. Colorado also gives a retirement income exclusion for seniors. Some retirees and low-wage families end up with no state tax owed. |
| Connecticut | Progressive income tax. It exempts Social Security for middle and low incomes and has a property tax credit. Many seniors and lower-income folks have zero tax liability after exemptions. Charities are exempt by state law from income tax. |
| Delaware | Has an income tax, but no sales tax. Retirement income exclusions (up to $12,500 under 60, and $20,000 for 60+) mean some retirees owe no tax. Low earners also can zero out tax with credits. Nonprofits are not taxed by the state. |
| Florida | No state income tax at all. Individuals pay no state tax on personal income. This makes Florida a haven for retirees and others seeking to minimize taxes (though they will pay sales and property taxes). |
| Georgia | Has income tax, but recent law increases standard deductions and offers a retirement exclusion for seniors (up to $65,000 of retirement income per person over 65). Many low-income families or seniors can have no state tax. |
| Hawaii | Progressive income tax (with high rates at top), but generous personal exemptions and credits for low-income residents. Social Security and many pension incomes are exempt, so some retirees and low earners owe nothing. |
| Idaho | Has income tax, but doesn’t tax Social Security. Provides a grocery tax credit that can offset some taxes. Lower-income households often owe nothing after standard deduction and credits. |
| Illinois | Flat 4.95% income tax. Uniquely, Illinois exempts all retirement income (pensions, IRA withdrawals, etc.) and Social Security. So many retirees owe zero state tax. Low-income residents get a tax credit that can reduce liability to zero. |
| Indiana | Flat ~3.15% income tax (plus local taxes). Offers exemptions like a rental deduction and elderly credit. Social Security is not taxed. Lower-income individuals often owe no state tax after basic deductions. |
| Iowa | Progressive tax, but recently overhauled: as of 2023, Iowa began phasing in exclusions for retirement income (including all Social Security, which is now exempt). Low-income credits can eliminate tax for many. By 2026, Iowa will have a flat tax which still exempts retirement, meaning many seniors will owe nothing. |
| Kansas | Flat 5.15% (as of 2023 changes). Exempts Social Security for income under $75k. Standard deductions often wipe out tax for low earners. Charitable organizations and churches are exempt from Kansas income tax. |
| Kentucky | Flat 4.5% income tax. Kentucky allows a pension income exclusion and doesn’t tax Social Security. It also has a credit for low-income individuals. A portion of residents, especially retirees and low earners, owe no state tax. |
| Louisiana | Progressive rates (2% to 6%). Louisiana’s personal exemptions and credit for low-income residents can result in no tax due at lower incomes. Social Security is exempt; up to $6,000 of pension income is also exempt for retirees, meaning some seniors pay nothing. |
| Maine | Progressive tax. Social Security fully exempt. A refundable sales tax credit and property tax fairness credit help low-income Mainers offset taxes – some get their state income tax to zero or a refund. Nonprofits are exempt from Maine income tax. |
| Maryland | Progressive tax with local add-ons. Doesn’t tax Social Security. Has tax credits for low-income earners (earned income credit) and a pension exclusion for older taxpayers. Many lower earners and retirees have no state tax bill. |
| Massachusetts | Flat 5% income tax. Does not tax Social Security or most pension income. Has a limited low-income credit that can reduce or eliminate tax for those under certain income levels. Many nonprofits (e.g., charities, religious orgs) are exempt from the state’s corporate excise tax. |
| Michigan | Flat 4.25% income tax. Social Security is exempt, and there are age-based deductions for other retirement income depending on birth year. Low-income households may qualify for credits that bring state tax to zero. Nonprofits are exempt from Michigan income tax. |
| Minnesota | Progressive tax. Provides a refundable Working Family Credit (similar to EITC) that helps low-income families eliminate tax. Minnesota is also phasing out taxation of Social Security for middle incomes. Some households, especially with children or seniors, end up owing no state income tax. |
| Mississippi | Has income tax but as of 2023, the first $18,300 of income for a single filer is 0% (due to a tax cut). Social Security and all qualified retirement income are fully exempt. This means many average retirees and low-income workers have no state tax liability. |
| Missouri | Progressive tax (top rate ~4.95%). Social Security is exempt for many (under certain income thresholds) and there’s a public pension exemption. Low-income families may owe nothing after credits like the Missouri Property Tax Credit (for renters/seniors) which is refundable. |
| Montana | Progressive tax. No state sales tax. Montana provides an exemption for Social Security (under certain income levels) and a partial exemption for pension income. With these and low-income credits, some Montanans owe no state income tax. |
| Nebraska | Progressive tax. Nebraska has started to phase out taxation of Social Security (50% exempt in 2022, aiming for more). There are credits like the Nebraska Earned Income Credit. Some low earners and many Social Security recipients now pay zero state tax. |
| Nevada | No state income tax. Individuals and businesses owe no income tax to Nevada. The state relies on sales taxes, tourism, and gaming revenue instead. So anyone living in Nevada has a default $0 state income tax bill. |
| New Hampshire | No tax on wage income. New Hampshire historically taxed interest and dividend income (at 5%), but it’s phasing that out by 2027. As of 2025, the interest/dividend tax rate is lower and will soon be zero. So effectively, NH residents pay no tax on their ordinary income; only high investment earners had some tax and that’s ending. |
| New Jersey | Progressive tax. Does not tax Social Security or military pensions. Also offers deductions for pensions and retirement income up to certain limits. Many NJ seniors pay no tax. The NJ Earned Income Credit can wipe out tax for low-income workers. |
| New Mexico | Progressive tax. Recently exempted Social Security for many (income limit applies). Has a low-income comprehensive tax rebate and other credits that often eliminate tax for low earners. Nonprofits are not taxed on income related to their mission. |
| New York | Progressive tax (and NYC adds its own tax). NY exempts Social Security and offers a pension exclusion ($20k) for retirees. It also has credits like the Empire State Child Credit and state EITC that help low-income families offset taxes entirely. Many low earners and retirees in NY owe no state tax after these breaks (though NYC residents still pay city tax if income is above small exempt amounts). |
| North Carolina | Flat 4.75% tax. NC doesn’t tax Social Security and has a child deduction for lower incomes. While the flat tax means no low bracket, the standard deduction is fairly high, and those under it owe nothing. Many NC families at the lower end have zero tax due thanks to that deduction. |
| North Dakota | As of 2023, ND introduced a 0% bracket for lower incomes, meaning many pay no state tax on roughly the first $44,000 (joint) or $27,000 (single) of income. Above that, rates are low (1.1% to 2.5%). Social Security is exempt for middle/lower incomes. Net result: a large share of ND residents, especially in lower brackets, will have zero state tax. |
| Ohio | Progressive-ish tax with several brackets topping out around 3.99%. Ohio’s tax has a large zero bracket: income under $25,000 incurs no tax. It also offers credits for low-income residents. So many Ohioans – lower earners – face no state income tax. Retirement income (like pensions) have some credits too. |
| Oklahoma | Progressive tax (0.25% starting bracket up to 4.75%). There’s a generous standard deduction and personal exemption that cover modest incomes. Social Security is fully exempt; other retirement up to $10k is exempt. These factors combine so that many low-income individuals and couples owe no Oklahoma income tax. |
| Oregon | Progressive tax (5% to 9.9%) but notably, Oregon has no sales tax, which means consumers pay no tax on purchases. For income tax, Oregon has a credit for low-income taxpayers that can zero out tax, and it exempts Social Security. Some low earners, especially with kids, end up with no state income tax burden. |
| Pennsylvania | Flat 3.07% tax on earned income. However, Pennsylvania does not tax retirement income at all (including 401k/IRA withdrawals and pensions), and it doesn’t tax Social Security either. This makes PA very friendly to retirees – most pay zero state income tax. Low-wage workers below a certain threshold effectively pay no tax due to forgiveness credits. |
| Rhode Island | Progressive tax. Has an earned income credit (partially refundable) that helps wipe out tax for low-income workers with kids. Social Security is exempt for many (under income cap). These mean a chunk of RI filers owe no tax. Nonprofits are exempt from state business taxes. |
| South Carolina | Progressive tax (3% to 6.5%, but first $3,200 is 0%). SC provides a generous deduction on retirement income ($15k for seniors) and doesn’t tax Social Security. Combined with low-income credits, many seniors and working poor in SC end up owing no income tax. |
| South Dakota | No state income tax. Residents and businesses pay no income tax at all to South Dakota. (The state relies on other taxes like sales tax.) If you live and earn in SD, your state income tax is always zero. |
| Tennessee | No state income tax. (Tennessee previously had the Hall Tax on investments, but it was fully repealed by 2021.) Now, Tennesseans pay no tax on wages or investment income at the state level, making it a completely income-tax-free state. |
| Texas | No state income tax. Texas is another big state where individuals pay nothing on their income to the state. This attracts many people and businesses (though property taxes in Texas are comparatively high to fund local services). |
| Utah | Flat ~4.85% tax, but Utah provides a tax credit that effectively exempts some income for lower earners. It also now offers a Social Security tax credit to offset benefits for middle incomes. Many low-income Utah families owe zero state tax after the credits, even with a flat rate in place. |
| Vermont | Progressive tax. Vermont exempts Social Security for lower incomes and has a state EITC (36% of the federal EITC) – together these can eliminate tax for many low-income families. Charitable organizations are generally exempt from Vermont corporate income tax. |
| Virginia | Progressive tax (2% to 5.75%). Virginia has relatively low standard deductions but does exempt Social Security and offers age deductions for the elderly. It also has a credit for low-income individuals. Some Virginians at the bottom of the income scale or on fixed retirement incomes pay no state tax. |
| Washington | No state income tax on wages. Washington state has none, which means workers keep all their earnings free of state tax. (Note: In 2022, WA introduced a limited capital gains tax on high investment profits, but the vast majority of residents still pay zero state income tax.) |
| West Virginia | Progressive tax. WV recently phased out taxes on Social Security (by 2022 for all but high incomes). It offers credits for low-income elderly and disabled. Many lower-income residents and those on just Social Security now owe no state income tax in WV. |
| Wisconsin | Progressive tax (3.5% to 7.65%). Wisconsin has a significant state EITC for families and exempts Social Security. It also has a sliding scale deduction that benefits middle-income earners. As a result, a good number of low-income Wisconsin residents owe no state tax after these adjustments. |
| Wyoming | No state income tax. Like other no-tax states, anyone in Wyoming pays zero state tax on their personal or business income. Wyoming uses mineral revenues and sales tax to fund services instead of an income tax. |
This state-by-state map shows that your tax fate can vary by location. If you’re in Florida, Texas, or other no-income-tax states, you automatically have an edge: your earnings aren’t subject to state tax at all. In high-tax states like California or New York, it takes more conscious planning (or simply being in a low income bracket) to end up with no tax. However, even those states have mechanisms to ensure their neediest residents typically owe nothing (or even get refunds), aligning with federal policy.
Retirees can see huge differences: States like Illinois, Pennsylvania, and Florida essentially don’t tax typical retirement income, letting many seniors live income-tax-free. Meanwhile, some states tax retirement distributions unless your income is low (though Social Security is widely exempted now across states).
One constant in all states: bona fide nonprofits and charities don’t pay state income tax on their charitable activities, mirroring the federal exemption. And virtually every state provides for low-income exclusions or credits to relieve those at the bottom.
Next up, we’ll address some frequently asked questions about legal tax avoidance, to clear up any lingering curiosities.
FAQs: Legal Tax Loopholes and Exemptions
Below are answers to some common questions people have – as seen on forums and Reddit threads – about who doesn’t pay taxes and how. Each answer is brief and to the point:
Q: Can I really live tax-free by moving to a no-income-tax state?
A: Yes. In states like Florida or Texas with no income tax, you’ll pay no state tax on earnings (you still owe federal tax).
Q: Do billionaires truly pay no taxes sometimes?
A: Yes. Some billionaires legally had zero federal income tax in certain years by reporting no taxable income and using deductions.
Q: If I start a church or religion, can I avoid taxes?
A: No. You can’t simply create a fake church to dodge taxes; only genuine religious organizations qualify for tax-exempt status.
Q: Does an LLC or small business mean I don’t pay taxes?
A: No. An LLC doesn’t pay corporate tax, but its profits pass to you and you pay income tax on them (unless there’s no net income).
Q: Are there really 47% of people who pay zero tax?
A: Yes. It varies by year, but roughly 40%–45% of households owe no federal income tax due to low incomes or credits.
Q: Do churches pay property or sales taxes?
A: Often no. Churches are usually exempt from property tax, and donations aren’t taxed. Sales tax on church purchases depends on state law (many states do exempt such purchases).
Q: Can I gift all my money to my kids to avoid taxes?
A: Yes. Gifts aren’t income taxable to your kids. Just beware large gifts may require a gift tax form if over annual limits (though most people never owe gift tax).
Q: If my income is under the standard deduction, do I need to file a tax return?
A: No. If you earn less than the standard deduction (and have no other filing requirement), you generally don’t need to file a return because you owe nothing.
Q: Can wealthy people use trusts to pay no taxes?
A: Yes, sometimes. Certain trusts (like charitable trusts) can minimize taxes or defer gains, but they usually reduce taxes rather than eliminate them entirely.
Q: Do nonprofit employees pay taxes on their salary?
A: Yes. Working at a tax-exempt nonprofit doesn’t exempt your wages – you still pay normal income and payroll taxes on your earnings.
Q: Is not paying any tax bad for my Social Security or benefits?
A: No. Not owing income tax doesn’t hurt benefit eligibility. But if you have zero earnings, you won’t earn Social Security work credits for retirement.
Q: Are Native Americans exempt from U.S. taxes?
A: No (not generally). Native American individuals pay U.S. income tax like others. Only specific income (e.g. some earnings on tribal land) might be exempt.
Q: Will investing in only municipal bonds let me avoid taxes?
A: Yes. Interest from municipal bonds is federal tax-free (and often state tax-free if issued in your state), so income solely from muni bond interest incurs no federal income tax.
Q: If I lose money in my business, can I pay no taxes?
A: Yes. A business loss can offset other income and potentially bring your taxable income to zero (completely legal, as long as the losses are real).