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How much do you need to earn to be happy? Could you get by on $12,000 a year?

The folks at W4 Resistance advocate withholding all or part of your Federal income tax in order to resist the war in Iraq. I am not interested in the political motivations here — Get Rich Slowly is a personal finance blog, not a political blog — but I am fascinated by these techniques. Here’s how it works:

File a new W-4 form with your employer for 2007. On line 7, you can claim exemption from payroll withholding. All you do is write in the word “Exempt” on line 7, sign and date the form and give it to your employer. No more income tax will be withheld.

Can it really be that easy? Of course not. There’s one gigantic catch:

Unless you can really claim no tax liability (such as by having a very low income or a lot of deductible losses), the IRS will consider this to be tax evasion and you will be hassled.

In order to avoid “hassles”, you must reduce your income below the taxable level, which is $8,450/year for most people. You can sneak additional income through various tax deductions, the most significant of which involves maxing out a traditional IRA — contributions are generally tax-free up to $4,000.

W4 Resistance includes the story of one person who has actually been able to live on $12,000 annually for the past three years. You don’t have to be that extreme to learn something here — these techniques are useful to anyone who wishes to live a more frugal lifestyle.

The author suggests cutting spending wherever possible:

  • Get rid of cable television.
  • Unplug all appliances.
  • Drive less.
  • Buy generic.
  • Cook from scratch.
  • Drink only water.
  • Don’t eat out.
  • Never buy garbage bags.
  • Minimize the use of heat and air conditioning.
  • Don’t buy things you don’t need.
  • Repair things, don’t replace them.
  • Buy used.
  • Never pay interest.
  • Hang clothes to dry.
  • Don’t smoke or drink.

With the money saved from doing the above, the author invested in a few things that pay dividends in the long run:

  • Compact fluorescent bulbs.
  • A modern, energy-efficient refrigerator.
  • A vegetable garden.

Missing from these lists is any mention of housing. The author found a creative way to live rent-free, and suggests that others may be able to brainstorm similar arrangements. But for most of us, housing is going to be a major expense. Also, the author admits that marriage, kids, and pets make things more complicated.

Stories like this intrigue me. I’m drawn to Thoreau’s Walden because he, too, lived a life of severe frugality (albeit one subsidized through extensive borrowing). I like to believe that I could do this, too, if the need arose.

Check out these past stories of extreme personal finance:

Now that I think of it, I suspect my cousin Ted may support his family on an income nearly this small. He’s caretaker for a place in Eastern Oregon, grows much of his own food, and makes a living by weaving pine-needle baskets. I should interview him sometime to get his story of extreme personal finance.

[How I live on just $12,000 a year]