1/4/2012 2:27 PM ET|
5 tax breaks help rich get richer
Because the wealthier have a higher overall tax rate, when they get a tax break, it's far more valuable for them than it is for the Average Joe.
When it comes to tax deductions, it is good to be rich -- the richer, the better.
Middle-class America enjoys some of the same tax breaks as the wealthy on things like the mortgage interest on home loans, capital gains on retirement investments and donations to charity.
However, the rich enjoy these deductions and others to a wildly disproportionate degree when compared with the rest of taxpayers. According to the National Priorities Project, America's top earners got an average tax cut of $66,384 in 2011 while the bottom 20% realized an average tax savings of about $107.
Seth Hanlon, the director of fiscal reform for the Center for American Progress, says that while all tax breaks are well-intended, the "upside-down" nature of some cause them to miss their target.
"Most people don't see these as being government expenditures, but from an economic and budget point of view, they're really the same thing as programs that spend money directly," says Hanlon. "There are ways to reform them to make them work better."
Many agree, including President Barack Obama, Warren Buffett and Bill Gates.
Here are five tax deductions that help the rich get richer.
1. Mortgage interest
The mortgage interest deduction on your federal tax return is intended to encourage homeownership by giving you a tax break on the interest you pay on your house note.
There is little question it benefits millions of middle-class homeowners as well as the wealthy. But does it provide a compelling financial incentive to own rather than rent? Not so much.
According to a study (.pdf file) by the Wharton School at the University of Pennsylvania, mortgage-interest deductions for households with incomes between $40,000 and $75,000 average just $523, while households with incomes above $250,000 enjoy an average write-off of $5,459, or more than 10 times as much.
You must itemize on IRS Form 1040 Schedule A to claim the deduction. If you do, you can also deduct the interest paid on a second home. The rich do both, but most of us do neither.
"For millions of taxpayers, therefore, the mortgage-interest deduction provides no added incentive to buy a home," says Hanlon. "It makes no sense in terms of targeting the incentive at the people who need or could use it."
2. Capital gains
Why does Buffett, a billionaire, have a lower income tax rate than his secretary?
Two words: capital gains.
Long-term capital gains, which derive from the sale of investments such as stocks and bonds held for more than a year, are taxed at 15%. That's well below the 35% maximum tax rate on ordinary income such as wages.
The preferential tax treatment of capital gains is widely viewed as regressive, because the rich, who derive a disproportionate share of their income from capital gains, pay less than half of the tax rate on that income compared with middle-class wage earners.
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Wow what a poor article. Sorry that the author can only twist numbers one way.
Wow, my first post ... just can't take it anymore. A number of posts here are just repeating hype and assertions, that are just plain wrong. Stuff like:
"And it is still a fact that even with all these so called big dividends for the rich, the rich or the top 10% still are responsible for the 85% of the revenues the government takes in?????"
"Hey MSN: I'm still waiting for the other half of this article....ie the one with the picture of the 47% who pay ZERO in taxes"
"The top 1% pay 47% of the taxes."
And so forth. I understand the tax code is a mess, but a relatively easy way to find out what's really going on is to get the reports on WHERE the government revenues come from. This data easily indicates, in pie-chart form even for the numerically challenged, that the "rich" do not pay most of the taxes. An important fact is that the largest chunk of collected revenue is from FICA, both the part that the individual pays, and the part that the employer matches. (If you are self-employed, you might know this, as you pay both parts.) The government collects more from FICA than they do all income tax. (Corporate taxes are a distant third, single-digit in overall contributions, but that's an entirely different discussion.)
That the employer matches FICA helps hide the tax burden of FICA to the individual. It is important to remember that when an employer is deciding how much to pay you, or whether to pay you at all, or whether to send your job overseas for that matter, they look at the complete cost of employing you. Heck, if the employer didn't have to pay this matching, maybe they could give you a raise. It should be counted, since it is money the government takes from you being employed.
If more money is collected through FICA, then how can the top 1% pay 47% of the tax? (Or some other number ... there are lots of numbers thrown around like this.) Everybody stops paying FICA at around $117,000. If you make exactly this amount, you pay the most FICA possible as a burden against your income. If you make $10,000,000, your percentage of FICA is very small indeed.
Also, for all of those taxpayers that "pay zero" ... FICA is applied to the very first dollar you earn, so the concept of 47% of folks paying zero is a complete crock. They may pay zero income tax, but this is completely different from their tax burden.
Remember this when you hear that word "entitlements". The taxes that typically pay for "entielements" come from the "poor" (those who do not cap on FICA). There is nothing wrong with these taxes going back to the people that paid them. The word "entitlement" maybe should be reserved for those who make millions and get to take advantage of tax deductions.
It gets worse. I made a good stock investment a while ago, sold after 2 years, paid taxes at the capital-gains rate, and thought I was set. Come April 15, I still owed (a lot) due to this sale. Why? Because this sale just sank me deeper into AMT. I lost my mortgage and state deductions, so in effect I got to pay the full rate, even though I took a risk in the market and all that stuff that I was supposed to do. Capital gains rates are not for the "average" guy, as you will take it in the shorts anyway. It is for the super-rich, those who already blew through the AMT penalty.
BTW: I am on the edge of 1% / 99% groups income-wise. I do not make enough to seriously take advantage of tax loopholes, and as such, I pay a lot of tax, relative to my overall income. Far greater percentage-wise than the truly rich.
Lets see an article that talks about how low income folks milk the system, and hate on the rich!
I'm middle class, I make on average $40,000 a year and get little back when I'm not sending a check!
Have you guys noticed how much lower class Americans are getting back at years end??? I have a co-worker getting $5,000!!!! Lets not go into all the free benefits!!!! Welfare, Food stamps, Housing assistance, cell phones!!! How much more do you guys want?
Get some self respect and stop pushing your problems on the ones that work for a living!!!
The two items I feel unfairly benefit the wealthy is the second home deduction for mortgages and the 15% Capital gains for the sale of stock. Most other people cannot afford to do either. There is no reason that someone who has to work should pay more in taxes, including SS tax than someone who holds and sells a stock a year later. Capital gains should be taxes at ordinary income, they still make money either way.
I am tired of people telling me I am not paying my fair share when about 48% of my income (35% fed and 8.5% Minnesota state tax & FICA & Medicare & Medicaid) goes to taxes and when those who complain are paying virtually no tax. How upside down is that? What a crock.
Bankrate.com should fire Jay MacDonald for being completely disingenuous and/or incompetent. His thesis relies on the flawed premise the that Federal Government has claim over your income. Give me a break.
A skewed article.
The top 1% pay 47% of the taxes. Their "tax break" for 401Ks is actually less than the proportion of the money they give. By leaving out this standard, the article is basically just complaining that those who earn a lot are able to save money on the same write-offs available to all Americans.
Some of the tax codes are meant to stimulate investment. For instance the capital gains rate for holdings over 1 year strongly encourages wealthy investors to keep their money in place for a year or more. If it didn't, and there was no difference based on how long money was held, then why not try to time the market and move money in and out day by day? Such large movements would play havoc with our economy.
OH CPA, don't get your panties in a bunch. If you have something to post, post, unless you would rather sit around bashing other people.
Obviously, I wrote this post quickly. I would not have posted if I didn't know what I was talking about. Of course I kow that contributions to a 401k are tax DEFERRED and you pay income tax on the distributions. I had cap gains in my mind after I read the article and that's what I typed. The point was, obviously, that anyone who has access to a 401k has access to a "tax loophole" that many whine is only for the rich.
Can we get back to the article itself instead of bashing other posters? Jeez.
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