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.
"Capital gains are highly concentrated," says Rebecca Wilkins, senior counsel for Citizens for Tax Justice. "Most of the capital gains are earned by folks in the top 10%, and it's even concentrated more than that. So the capital gains tax break, which is a 20 percentage-point difference in the amount of tax that is paid on those, is going almost all to the top 5%."
In fact, Americans with an annual income of $1 million or more, or 0.3% of all taxpayers, enjoy 70% of the capital gains benefit, says Hanlon.
The favorable capital gains rate is expected to save the wealthy (and cost Uncle Sam) $38.5 billion for fiscal 2012, according to the Office of Management and Budget.
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