When the Rich Get Richer Through Tax Deductions

In life, the general rule is that the richer in material wealth, the better. This is also true for tax deductions – in a National Priorities study, the highest earners will enjoy $66,384 in annual tax cuts on average while the bottom 20 percent will only get $107 in 2011.

Of course, middle-class Americans also enjoy the same tax breaks as their high-income counterparts on things like donations to charity, capital gains on retirement-related investments, and mortgage interest on home loans, among others. But there’s a difference since the rich enjoy the tax deductions to a higher degree – critics of the current tax system will say that the rich enjoy it to a wildly disproportionate degree – than their middle-income counterparts. Many well-known people including President Obama, Bill Gates, and Warren Buffett agree that, indeed, tax reforms in this area are a must!

Let’s take a look at the tax deductions that contribute to the rich getting richer with every tax year.  

Step-up In Basis

Basically, the step-up in basis allows wealthy people to pass their appreciated assets to their heirs without paying taxes on the transfer. This is aside from the $40 billion in tax breaks every year that the wealthy enjoy; the breaks are courtesy of the 15 percent capital gains rate.

Under special IRS rules on inheritance, the heirs who inherit assets like real estate, stocks, and privately-held businesses are allowed to step up their basis. This means that the heirs will only be taxed based on the gain in value of the assets from the time these were inherited. The result: The wealthy saves as much as $61.5 billion in 2012 (Office Management and Budget), the same amount in lost revenues for Uncle Sam.  

Since only the rich has large estates to pass on to their heirs, they become richer because they can escape capital gains taxes.

Retirement Savings

Americans have tax-deferred retirement plans as a way to save for retirement, a government program designed to encourage the practice of saving for a future life without active employment. Uncle Sam loses approximately $142 billion in annual taxes by deferring taxes on pension plans, 401(k) plans, and individual retirement accounts – and it’s okay since Americans can save for their retirement years.

But here’s the catch: The wealthy tend to enjoy more of the tax benefits related to retirement savings since they have more money to save. According to a study conducted by the Tax Policy Center, the top 20 percent of high-income earners enjoy as much as 80 percent savings for tax write-offs in comparison with just 7 percent tax savings for the bottom 60 percent of earners.

Fortunately, you can enjoy tax breaks, too, as a middle-income earner by discussing your options with a Taxact consultant. Do it now!  

Leave a Reply

Your email address will not be published. Required fields are marked *