Why can’t a middle class individual use the same tax avoidance methods as the ultra rich to pay little to no income taxes?
In: Economics
In addition to the other good answers, there are tax benefits to some investments that middle class people can’t afford. Also…. can’t afford to pay for high-priced accountants and tax lawyers who make these tax avoidance methods happen. These experts have combed through the tax codes and know how to use them.
These days, the IRS is reluctant to start an audit with the very rich because it takes so much time and energy and so many people, all of which costs money and takes them from other tasks. It’s a lot easier to pick on middle class taxpayers who don’t have the same resources to deal with the IRS.
They can, owning an asset and slowly borrowing against it is tax free for everyone. However ultra rich usually are making it work by borrowing and spending a tiny fraction of their wealth. Spending the same fraction of a $250,000 home might be $600/year which doesn’t really support a lifestyle of the rich and famous (or really even lifestyle of someone who gets 2,000 calories every day from beans and rice and has a well used library card).
You totally can. First you hire a $70,000 cpa, then you tell the cpa to restructure all of your income to maximize tax savings, forming corporations and associated structure and setting up accounts and turn filling all the paperwork with IRS and states.
What was the second step?
[removed]
They usually don’t have the same assets in order to qualify. For example, if there is a tax reduction on a second home, where you get a discount on the taxes for a second house if you have one, you can’t qualify for that discount if you don’t have two homes.
generally they can, but they cant afford to mess it up and some of these loopholes are there specifically for the super rich(Sadly this is a common theme in a lot of tax codes) as ” favors”.
Different type of wealth building. Take somebody like Jeff Bezos… most of his wealth is Amazon stock. It’s value climbs to $100B but he only pays taxes on gains when he sells. So even as his stock has gained 10’s of billions in value over the past year, he isn’t taxed on that. Let’s say he sells $10m worth of shares to cover living expenses, he pays capital gains taxes on that, which are lower than income taxes at top income bracket — only 20% for incomes over $441k. So in this example, assuming Bezos’ shares had 0 cost basis, his $10m sale would trigger a $2m tax bill. Not nothing, but basically a rounding error vs. his wealth.
The other way that some wealthy reduce taxable income is through a business. By deducting expenses “for the business” they can cut their taxable income and buy things with pre-tax dollars. Say you’re a dentist who wants to vacation in Hawaii… find a Dental Conference going on there, attend and tack on a vacation after the conference — deduct some of the hotel, meals, all the airfare, etc. to cut your true cost of vacationing in Hawaii. Maybe he leases his Mercedes through his dental practice, too, reducing his income and paying for the car with pre-taxed dollars. And that MacBook Pro he sometimes uses to update patient notes from home? Same thing…
They could, but don’t typically have the resources to do so. Rich people might avoid paying taxes because they have no income, but rather because the value of their company grows. A middle class person could have a company, and could also not take a salary, but that is not very common. A rich company could save a lot of money on taxes by deducting things as business expenses. A regular person can do that as well, but their expense would be a lot smaller on average.
You gotta spend money to save money on taxes.
The problem is the rules are not proportional — they are based on sums, not percentages of income.
So Jeff Bezos can spend 0.001% of his income and qualify. The middle class need to spend 10000% of their income.
The IRS is more willing to investigate poorer people because it’s less complicated. They’ve admitted to avoiding cases with the ultra rich because of all the complicated laws and loopholes they can take advantage of.
Latest Answers