Living a tax-free life

Factual Questions
1

Let’s say I win the lottery and get the payout of $30 million. (side question - can I reduce my tax liability through income averaging, investing in a house, anything?!). After taxes I clear $20mil which I put into tax-free bonds (like munis). Assume 5% return to get $1mil a year ALL TAX FREE. Would the IRS have a problem with this and still make me pay taxes in some form?

2

In general deductions like mortgage interest and charitable deductions reduce your taxable income. at the highest federal tax braket of about 36% or so every $1 spent or donated reduces you tax by 36 cents. So you would have to spend or donate almost all of your income on these approved things. to get you taxes down to 0.

Beyond that there exists the Alternative Minimum Tax which limits how much you can deduct.

Your best bet would be to invest in tax free municipal bonds. The income from those is free from tax. The downside is they pay very low interest rates. I am not sure how ATM fits in with those.

3

You might need to reread the OP… :slight_smile:

-FrL-

4

There are also Tax-free annuties.

But yeah, if you have a bunch of tax-free income the IRS will be OK with that.

5

It’s still unlikely to be a tax-free life, since you will still have sales tax and property tax, and perhaps other taxes I’m not thinking of at the moment.

6

Your goal should be to maximize your after-tax return, not to minimize the amount you pay in taxes. It’s all well and good to make 4 or 5% tax-free, but wouldn’t you rather make 7 - 10% after taxes?

7

My question was not on how to optimise my returns, but rather if IRS would allow someone to make a lot of money tax-free.

8

Not all municipal bonds are exempt from the alternate minimum tax. Interest on “private activity” municipal bonds that were originally issued after August 7, 1986 must be included when figuring the AMT. “Private activity” bonds typically include any municipal bond the proceeds of which are used to finance a facility for the use of a private business. Examples might include sports stadiums or arenas for pro clubs.

9

Don’t forget that the rules for “tax free” bonds vary from state to state, and what the feds might call “tax free”, your state might not (and vice versa).

10

Move to Canada, invest in Canadian lotteries. Bingo - tax-free income. (There’s the small technical detail of winning, but the theory’s sound :smiley: .)