3. Step-up in basis
If the wealthy enjoy roughly $40 billion in tax breaks each year thanks to the favorable 15% capital gains rate, their heirs save even more, courtesy of the "step-up in basis rule" in the U.S. tax code.
What's the step-up all about? Essentially, it allows the wealthy to pass along assets that have grown in value to their heirs without ever paying a dime of taxes on it.
Under special Internal Revenue Service inheritance rules, when you inherit assets such as stock, real estate or a closely held business, you are allowed to step up their basis -- what the deceased originally paid for them -- to their current fair-market value. Therefore, when you sell the assets, you would be taxed only on their gain in value from the time you inherited them.
Step-up in basis is expected to save the wealthy (and cost Uncle Sam) $61.5 billion for fiscal 2012, according to the Office of Management and Budget.
"Not surprisingly, this tax expenditure overwhelmingly benefits those who inherit from large estates because it allows gains to escape capital gains taxes if held until death," says Hanlon.
4. Retirement savings
Tax-deferred retirement plans are designed to help all Americans save for retirement. In 2011, Americans will save (and Uncle Sam will lose) $142 billion in taxes by sheltering their personal income in 401k plans, pension plans and individual retirement accounts, according to the U.S. budget.
Because the wealthy have more to save, they tend to reap more of the tax benefits of saving for retirement.
According to the Tax Policy Center, the top 20% of income earners enjoy 80% of the tax write-offs for retirement saving, while the bottom 60% take advantage of a whopping 7% of the tax savings.
Which is understandable, considering that the higher your income, the more likely you are to own a 401k plan with generous employer contributions. Nearly half of all Americans do not have access to employer retirement plans, and most who do can't afford to take full advantage of the tax incentive.
"It's, again, a question of targeting incentives," Hanlon says. "The tax benefits probably aren't as well-targeted as they should be. The wealthy probably would save regardless of the tax benefit."
5. Charitable deduction: Good cause, policy flaws
The charitable-giving deduction effectively operates as a federal matching program: If you make a charitable donation, you get a tax break. In fiscal 2011, the charitable deduction saved Americans (and cost Uncle Sam) $53.7 billion, according to the U.S. budget.
The problem with the charitable deduction is similar to that of the mortgage income tax break: The value of the deduction increases with income.
"If I give $1,000 to charity and I'm in a 10% tax bracket, I get $100 back on my taxes," says Wilkins. "But if I'm in a 35% tax bracket, I get $350 back from the federal government."
Plus, you have to itemize on IRS Form 1040 Schedule A to claim the charitable deduction.
"If we're trying to encourage charitable giving, we should be encouraging people with less money than people with more money to make those gifts," Wilkins says.
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