Why Do the Rich Pay Less Taxes? How You Can Pay Less Too

www.www.worldexecutivesdigest.com | Why Do the Rich Pay Less Taxes? How You Can Pay Less Too | Are you asking “Why do the rich pay less taxes?” Read this article to learn ways the rich avoid paying high taxes and how you can too.

The richest among us seem to be hell-bent on lessening their tax burden.

And for the most part, they manage to get away with it. Their incremental victories add up and foster a tax ecosystem that is rather unfair.

It brings forth a harsh disparity that plagues the financial health of many households. Most of those are on the lower-income side of the spectrum.

But, let’s face it: this state of affairs isn’t odds with the U.S. tax code. Yes, the law specifies big earners pay higher tax rates. But, in practice, there are many legal caveats at play.

Some of the reasons why do the rich pay less taxes may surprise you.

They certainly have various legal options at their disposal and you can utilize some of them too. So, let’s examine how to reduce that dreaded tax bill without provoking the IRS.

Numbers Game

Ultra-rich are versed in gaming the system to their favor.

They shape the lawmaking outcomes in order to lower the effective tax rates. They can also engage in cunning tax planning and categorize the assets they own.

Tax Cuts and Job Act from 2017 were instrumental in lowering the tax bracket. Now it stands at 37% on taxable income (it used to be 29.6%). This is just one indication of where we’re heading.

Warren Buffet has famously admitted he pays fewer taxes (percentage-wise) than his secretary.

This is due to the fact a lion’s share of his wealth is in the form of stocks, not wage income. Whatever the reason, it’s hard to justify this situation, which echoes the broader trend.

Why do the Rich Pay Less Taxes Again?

On a brighter note, we can take valuable lessons from the 1%ers textbook.

First off, they conduct tax planning and not as an end-of-the-year activity, but on an ongoing basis. They’re aware that one doesn’t have to earn less in order to pay less in taxes.

Instead, the trick is to get smart with adjusted gross income (AGI). It represents the baseline for calculating the amount of taxable income.

The first option is to categorize your assets into three tax locations: taxable, tax-free, and tax-deferred. In other words, you have to diversify your portfolio across different types of accounts.

If you’re unsure of how to go about this, consult with a financial advisor or certified public accountant (CPA).

Likewise, note that companies such as Silver Tax Group let you get in touch with tax attorneys. You can schedule free case evaluations with just a few clicks.

Charitable Donation and Easements

There’s no shortage of other creative ways to decrease tax obligations.  

For example, charitable donations are a staple tax-minimization tactic. The goal is to score deductions on tax rates. Since the tax law overhaul, the amount one can deduct has grown to 60% of AGI.

Furthermore, you can consider conservation easements to save some more cash.

These voluntary agreements limit the use of land in other to preserve its conservation value. They prove fruitful in all cases when a land holds added intrinsic value.

So, if you lay your cards right, you can make a charitable deduction that equals the amount of easement you put on the land.

When it comes to deductions for charitable contributions, it’s possible, but trickier to achieve. Namely, you would need to itemize your taxes properly.

Equity Exposure and Gain/Loss Management

There are some unique benefits associated with stock investment.

Relatively low taxes (for stocks owned for more than a year) allow the rich to take bigger risks. And depending on income, long-term capital gains rates are zero, 15%, or 20%.

On the other hand, Federal tax brackets fall into the 10%-37% range, following the earning power.   Short-term capital gains taxes for stocks held for under a year are chained to these tax brackets.

Moving on, the wealthy have a couple of other reliable strategies. They revolve around smarty managing gains and losses with the objective to deepen the tax advantage.

For example, at the end of the year, top investors take calculated losses in order to offset the recorded gains. Sometimes, they also try to defer capital gains by investing in opportunity zone programs. 

The takeaway to draw from this practice is clear. Consider improving equity exposure and stepping up your gain/loss management game.

Business-Like Asset Management

To go a step further, you can manage assets just like you would manage a business.

The idea is pretty simple. You create a business entity— a limited liability company (LLC) is a great option. This formal structure allows you to easily carry out investments on multiple fronts.

Yes, we know getting a business structure off the ground can be a daunting task. But, look at it this way. It’s a surefire method for accomplishing two crucial goals.

We’re talking about money savings and effective governance for your assets. The second benefit is amplified in cases of management LLCs.

Other Means of Reaping the Benefits

Next on the list of cost-effective avenues are gifts and estate exemptions.

Under the current tax law, they are temporarily doubled, until the end of 2025. This means that as an individual, you may be able to claim up to $11.18 million.

Again, setting up a trust makes sense as it facilitates the cross-generational passing of wealth. As long as it meets the limit, it qualified as a gift and comes free of taxes.

Finally, we would like to propose a defined-benefit plan.

It enables entrepreneurs to allocate significant amounts to their retirement. Contributions trim your taxable income and increase how much money you can save.  Of course, this approach suits the high-net-worth people the most.

Beyond defined-benefit plans, there are other tax-protected accounts. Think in terms of 401(k)s, 529s, student loan payments, Roth IRAs, health savings accounts, etc. They are all fair game.

When Less is More

Fairness of the tax code is a burning issue.  

Yet, the answer to the question of why do the rich pay less taxes isn’t so simple. We ought to leave solving of that matter to politicians.

In the meantime, it would be wise to take things into your own hands. No need to let high rates eat away at our budgets.

Start by fleshing out a plan and keeping taxes on top of the mind. Familiarize yourself with how the tax code works. Notice different types of investment carry involve different tax treatments.

Make sure to take advantage of various effective tactics that the rich have championed. Figure out which one works best in your particular case.

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