Top Ways To Avoid Income Tax – Part 1

It is the right, and IMO, duty of every citizen to structure their financial affairs to pay as little tax as possible and to avoid paying taxes whenever possible. Tax avoidance is not illegal, tax evasion is. The two are completely different from each other. Avoiding income tax is not the same as evading it. If you have ever contributed to an IRA, 401K or RRSP, you are in fact avoiding income tax. There are many ways to avoid income tax. Here are some methods used by the rich and powerful to avoid tax. Look for part 2 soon.

Don’t Make Income

This is not as stupid as it sounds. Out of all the things the government taxes, employment income is at the very top of the list. Therefore, if you want to avoid the biggest tax hit, don’t make income. How do you live with no income? You borrow it.

If you make $100,000 at a job, it gets taxed because it’s income. If you borrow $100,000 from the bank, it’s tax free because it’s not income. At this point, most people will say, “Ya, but you have to pay it back!” I say you have to be more creative. The next two examples should help illustrate this.

The Real Estate Equity Play

In this situation, our asset rich real estate developer put mortgages on his properties to the point where the rental income equal all expenses. If we assume he can borrow 75% of his equity and still be revenue neutral he would be able to borrow a nice chunk of cash to live on. If our mogul has $1 million of income producing real estate, he would borrow up to $750,000 tax free to do with as he pleases.

The money is not taxed because it’s not income. The rental income covers the cost of servicing the debt and other expense so the net income from operation is zero. So no income tax on that either. As the value of the real estate increases, the investor will be able to borrow more.

Borrowing against assets is a way to realize unrealized gains. Instead of selling the asset to realize the gain and getting taxed on it, the owner borrows against it to get the money out without paying any tax. It’s a lot easier to borrow $1 million than it is to make $1 million. It’s also tax free.

The Life Insurance Wrap

In this scenario, our tax avoiding friend has a life insurance policy with a big cash surrender value (let’s say $1 million). If he takes out the $1 million, he would lose the insurance and the money would be added to his income and be taxed at nearly 50%. It’s not a good deal and only a fool would do that.

What you would do in this is this situation is borrow against the cash value of the policy. A bank will lend up to 90% of the cash surrender value. That’s $900,000 to spend as you please. You can take it all at once or have it paid out over time. Because the money is a loan, it is not income and therefore not taxable. Furthermore, the bank will capitalize the loan so you will never have to pay it back.

How does the bank get its money back? When you die, the death benefit will pay off the bank loan plus accrue interest and any money left over will go to your beneficiary tax free. See my post on Using Life Insurance To Shelter Income for a more detailed explanation.

56 thoughts on “Top Ways To Avoid Income Tax – Part 1”

  1. Wow
    you’re incredibly creative. I’ll have to keep these strategies in mind as the money rolls in.

    Do you use any of them now?

    One Man. One Year. $100,000 online. Major IRS Fodder.

    1. John Chow says:

      You think this is good, wait until you read part 2. 😈

      1. I will wait for part 2–even though I didn’t fully understand part 1, but I am excited about paying less income taxes–even though I currently have no income… oh woe is me 😉

  2. If you read Rich Dad, Poor Dad, or any other Robert Kiyosaki book, he goes into great depth on how to pay as little income tax as possible. Being a business owner has great perks as far as taxes go – at least in the U.S. Great post through! *=)

  3. John, here’s an idea… write about making money online and for lack of a better phrase, quit your bitchin. If it’s not about Google spanking you, it’s Technorati playing favorites, and now tax and wage laws. For crying out loud, when was the last time you wrote a post about blog monetization?

    1. Joshua says:

      Last time I checked, the blog was John Chow dot Com.

      So, for lack of a better quote, ‘quit your bitchin’. :mrgreen:

      1. Well you might want to check again, the title of the home page is “Make Money Online with John Chow dot Com”. 😆

        1. Joshua says:

          I meant literally,, as in he can write about whatever he wants…

          And if you cannot see the relevancy of an income avoidance article on a ‘make money online’ blog you need to double check your bank account.

  4. bob cobb says:

    Very interesting, looking forward to part 2 😯

    1. Marc says:

      Thought you preferred to be called the Maestro.

  5. Michael Kwan says:

    Pardon my ignorance, but with scenario 1, wouldn’t you need to report that rental income as income, and thus, wouldn’t that be taxed?

    1. John Chow says:

      You would report the net rental income which would be next to zero since it’s eaten up by all the interest from the mortgage you took out.

      1. Simon says:

        exactly, the mortgage is tax deductible, so you would be left with practically nothing. Great post John, please keep these posts coming.


  6. Very interesting… No income tax sounds niccccce.

  7. Marc says:

    Here’s a couple U.S. shelters I’ll drop on ya. For the the sale of your house if it’s been homesteaded for 2 years. $250,000 if you’re single. $500,000 for married couples.

    Section 1031 for capital gains on real estate. Reinvest in another property within 90 days, taxes defered until resale, but you can rinse and repeat as much as you like. Caveat, keep your money in escrow or you’ll blow it.

    I’m all for avoidance and these are 2 of the mostimportant for the homeowner and property owner in general.

    Nice post John, but as you know I think some of your other ideas are bad for most people.

    1. Shaun Carter says:

      I love how you insist on anonymity while bashing here.

      1. Marc says:

        What anonymity. I gave my name. I’m not giving out my email address. John has it though. And I don’t have a website.

        I gave you a couple of tax avoidance tips that could be worth millions to all the rich people reading this blog.

  8. dcr says:

    You’re an evil, evil man, John Chow. 🙂

  9. @BE: It’s John’s blog, he can write about whatever he wants. If you don’t want to read about this, then unsubscribe and don’t come back.

    Personally, it’s these types of posts that keep me coming back.

    This was actually one of my favorite posts from you John, and I can’t wait to read Part 2.

    1. Sure, but when he makes his name by writing about making money online, and then virtually abandons that topic, its disappointing to say the least.

      If he’s going to write posts like this and the tax and wage law posts, he should change the title of this blog to something more representative. As of now it still reads Make Money Online and these posts don’t have squat to do with that.

      P.S. you can reply to individual comments by clicking on the blue “Reply to this comment” link on the lower right of the comment. It makes it easier to follow conversations than using the @ symbol.

      1. John Chow says:

        The blog’s tagline is The Miscellaneous Ramblings of a Dot Com Mogul. But fear not, I’ll be back on my make money online kick soon enough.

        1. The tagline is, yes, but the Title tag for the home page is “Make Money Online with John Chow dot Com”.

          If you really do get back to making money online, I’ll be a very happy camper. It’s been waaaay too long IMO. Not that it all has to be 100% business but the signal to noise ratio should remain pretty high.

        2. John, instead of combining the two topics, I would be very interested in reading a blog from you only about the *Miscellaneous Ramblings*, specifically related to business, real estate, tax, etc.

          1. That would be a very interesting idea and could quite possibly be a great (and profitable) niche. IMO, John really has the makings of about three blogs here, the make money online, the food, and cars. The tax/financial/real estate stuff could very well be another.

            Obviously I prefer the make money one but wouldn’t be nearly as annoyed if this stuff were just occasional. Lately it’s been 99.9% of the posts here.

          2. Tony says:

            I’d have to think that once you have made your money online you would want to keep it all and give as little as legally possible to the government. So talking about what to do with your money once you have made it is as important as talking about how to make it.

          3. Maybe it’s just me but I don’t take tax advice from a dot com mogul online. That’s what tax attorneys and accountants are for.

          4. Simon says:

            It seems a little cheaper this way. :mrgreen:

        3. I hope so, i dont read your blog for tax advice

          1. Exactly, nor do I read it for food critiques, car reviews, or any of the other stuff that has been filling this space lately.

            Like I said, John Chow dot Com has Jumped the Shark!

  10. Marc says:

    John, I have an idea for you. Write about how people who have the means can make millions and even billions of dollars and pay less than 15% in total tax without the need to offshore their money.

    Obviously there are plenty of places where you can pay zero tax essentially, but I mean by keeping it in the U.S. I don’t think Canada has as many breaks for the rich as the U.S.

    By the way while, I’m getting jabs in. Here’s Donald Trump’s method. Declare bankruptcy every 7 years. Every SEVEN years!!!

    I fully expect to here hime declare bankruptcy again within the next year. Hopefully, this will bring a dose of reality to the swooning legions who weren’t around in the ’80s to watch him flameout the money got from his father.

    1. John Chow says:

      I don’t believe Donald has ever declare bankruptcy. He was close to it but he managed to claw his way out.

      1. Marc says:

        Yes he has. Look it up. Also several of his companies which he described as diamonds flamed out with an ironic wimper that he did his beat to hush up. Remember the Trump Shuttle? What about the bankruptcy of the Taj that needed so much shoring up from additional banks it almost brought a few down. Nevermind real estate from the 1980s. You’ll have to do better homework than that John.

        1. John Chow says:

          Oh, you’re talking about the companies. I thought you were talking about Donald himself. He has never declared personal bankruptcy.

      2. Marc says:

        Just to break the Trump spell a little further. What is Trump’s net worth today verses what it was in 1988. I think this will show people how profitable his last 20 years have been. How to be a millionaire the Trump way means starting off as a billionaire.

        Alright, now I’ve angered enough people. Show me you slings and arrows.

        1. Marc says:

          John, stop being coy. He is rich, all his assets are essentially corporate.

  11. Jacob says:

    I guess personally, I don’t really mind paying income tax. Sure, I don’t like seeing that my money is being taken from me, but I move on from it real fast because there are more important things to worry about than the fact I am giving my government (the same people that happen to pay the soldiers that ensure I’m not getting blown up) money because in the end, it allows me not to worry about dying every other day. In my opinion, a citizen should want to see the growth of their nation, not try to deny it growth. But that’s my opinion.

  12. The biggest tip to avoid taxes is GET A GOOD TAX PREP TEAM!! I have an accountant, and tax attorney I pay yearly to prepare my taxes and tell me what I can and cannot deduct. Get a good relationship with your tax people and they will take care of you.

  13. Johnny says:

    really awesome (and tricky) ideas, can’t wait for part 2.

  14. feve says:

    what about move to china? i’m not positive, but i’ve head there is no income tax in china?

  15. So what about a regular guy making like $50k a year…what does HE do to avoid paying taxes?

    1. John Chow says:

      If he’s making $50K as an employee, there’s isn’t much. The only real tax shelter left to the middle class is the RRSP (IRA, 401K). Everything else has been closed off.

      1. Daniel says:

        Don’t Make Income… I like this idea…so creative 😉

    2. Tony says:

      Create a business and claim expenses

  16. Karl Staib says:

    Creative people have all the perks!

  17. Nathan Roe says:

    dont make income….hahaha i think i would rather be taxed :-X

  18. John,

    You make valid points about sheltering income from taxes. However, investing in real estate during one of the largest credit bubbles in history may not be a smart move. When owning income generating property, you also have unseen costs that needs to be paid from monthly revenue sources. What are these cost? Here are a few:

    Property Management

    Most investors will tell you that these fees cut into your net operating income by 40 to 45 percent. I tend to gravitate toward the 45 percent region.

    In addition, the easy liquidity for funding real estate deals is coming to a quick close with a Minsky moment last week.

    With that said, most investors will need to find real estate that is undervalued by 20 to 25 percent and come in with 5 to 10 percent down to make things cash flow (no more no money down). Ultimately cash flow is the name of the game here.

    Glad to see you posting about economic issues.


    Dr. Housing Bubble

  19. Moulinneuf says:

    “It is the right, and … paying taxes whenever possible.”

    That’s where I have to disagree , the biggest responsibility of a citizen of country is not to avoid paying there share of the taxes burden , but make sure that all the money they send is actually spent on actual service and infrastructure and not high payment to those doing the service and to pay out to friendly political groups.

    You make it sound like your own country and government are a different identity then you , when the reality is that the government is paying your stuff , with your money , when they cant pay because you did some creative ( not really sure it’s 100% legal ) avoiding , you end up having to pay more of the capital and extremely high interest , the next year , because they could not write a check for the amount and be done with it.

    Paying high level of taxes is not something bad in itself , it means that you contributed the most to your country economy and use a lot of its service and are proud to pay for it to be a healthy Country financially.

    Your right about one thing , it’s not illegal yet and his a grey area , but , don’t think for a second that your really saving on paying taxes doing those.

    That’s like comparing 1 small peanut to an elephant on size , on a scaled balance , your not going to really save by saving 3 or 4 peanut vs the elephant and in the end he will eat your peanut.

    In other word I don’t think your 1 000$ – 10 000 savings is going to offset the buying of broken used submarine at four time the price of new one per unity.

    ROI ( return on Investment ) is what really save paying taxes.

  20. John, thanks for the excellent tips, as I reflect on the thousands of $$ that I pump into the governments pockets each year, I will be eager to explore some of your suggestions.

  21. Mike says:


    You have it all wrong.

    You can only deduct the “mortgage interest” if you refinance your house for “HOME IMPROVEMENTS” for rental income. You can just borrow the money and deduct the mortgage interest as EXPENSE.

    Taking out $50,000 is understandable but taking out $750,000 for home improvement? Even $150,000 is extreme. If you do that, I can almost guarantee you will receive a IRS field audit.

    2nd point) How does one get $500,000 or $1,000,000 to buy a house (assuming no investment appreciation or inheritance)? You have to report income to proof that you can buy the house. If I make $250,000 online and I deduct $225,000 as expense leaving me with gross income of $25,000. (After Self Employment tax, Federal Tax, State Tax, Cost of Living, the maximum you can save is $5,000-$10,000/year). You can never buy a $500,000 or $1,000,000 with that gross income. So If you do want to buy a expensive house, you NEED to report higher income which means paying TAXES to Uncle Sam.

    Either way, you have to pay tax to Uncle Sam. There are ways to virtually pay no tax but it’s more or less “extremely” gray or black hat.

  22. This is an interesting series.. I’ve printed these tips, and have set them aside..

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