Why Do Rich People Pay Less Tax Than the Rest of Us?

The richer you are the more tax you’re required to pay, right? Well, not necessarily. “Taxing the rich” has been a hot topic in the media for decades and has many complex points and counterpoints. So, let’s investigate. Do the wealthy actually pay less tax than the rest of us? And if so, how do they do it?

According to a shocking ProPublica study, the 25 wealthiest Americans made a combined $401 billion between 2014 and 2018, but only paid $13.6 billion in taxes, or about 3.4% of that amount. It’s easy to understand why many Americans are upset when you contrast that number to 28.4%, the average U.S. tax wedge for a single worker in 2021. However, the conversation doesn’t end with those statistics. There are many kinds of taxes the rich pay that the average American does not.

For example, a blue-collar worker who pays 22% federal income tax, but rents his home, pays no property tax (at least not directly). A wealthy man who owns 10 C Corporations might pay 10% personal income tax as a person, but pays millions in property taxes for those factories, millions more in payroll taxes for his employees, and millions more at death in estate taxes.

How Can I Pay Less Tax?

The good news is that no matter how much money you make, there are strategies you can use to reduce, eliminate, and defer taxes. Here are some common strategies that the wealthy use, that may apply to your life as well.

1. Rich people have historically used donations to nonprofit organizations as a strategy to reduce their tax obligations. Additionally, the amount you may deduct has doubled under the new tax code, going from 50% of your adjusted gross income to 60%. As NerdWallet reported, “In general, you can deduct up to 60% of your adjusted gross income via charitable donations, but you may be limited to 20%, 30% or 50% depending on the type of contribution and the organization. Special charitable trusts can be structured to create deductions to reduce tax and produce income at a later time.

2. Choosing the right retirement account can save you thousands of dollars in taxes. Taxes are likely to go up in the future, and many Americans are opting to transfer their money into a Roth IRA. This specific type of account allows you to withdrawal money in retirement tax-free by paying taxes on the money you put into the account now.

3. Many investors make more money from capital gains than they do from their day-to-day job. While capital gains taxes also exist, they are generally taxed at lower rates than ordinary income. There are many ways to defer, reduce and avoid capital gains taxes. For example, a 1031 exchange, a Delaware Statutory Trust, an installment sale, and/or investing in qualified opportunity zones.

4. A large portion of the ultra-rich have money in offshore accounts. By holding their money in low-tax jurisdictions, like Monaco, the rich protect their funds from taxes, creditors, and lawsuits. Monaco is considered a tax haven because of its tax laws and policies. Monaco doesn’t collect personal income tax or capital gains taxes. There are also no property taxes in Monaco, although rental properties are taxed at 1% of the annual rent plus other applicable charges. Additionally, Monaco eliminated taxes on dividends paid by local companies and does not charge a general corporate income tax. Another popular asset protection location is The Cook Islands. In The Cook Islands, the court is statutorily prohibited from recognizing any other jurisdictions, court orders or judicial proceedings.

5. Hire a tax planner. It’s tough to keep up with the changing tax code when you have a million other things going on in life. An experienced tax planner can help you take advantage of specific opportunities that most people are unaware of.

So, there you have it. In some instances, the wealthy do pay less tax than the rest of us, and in other cases they don’t. By taking advantage of little-known tax strategies and opportunities, you too can cut your tax burden dramatically. If you’re ready to meet with a tax professional and potentially save hundreds of thousands of dollars in taxes, give the Ohio Tax Advocates a call today and schedule a free consultation. Call 614-356-8647.