Tag Archives: one percent

Update: Tax Benefits only the Rich Enjoy

September 3, 2014 Joy 4 Comments

One of my readers, Jake, posted a thoughtful response to my post 10 Tax Breaks Only the Rich Enjoy noting that my explanations were factually inaccurate. I thought he had some really good points, so I wanted to address each below. I also want to clarify that I do not necessarily have anything against rich individuals who worked their way up to obtain wealth. The problem is that once a family has money they can maintain that money within their family for generations, with many “trust-fund babies” not having to earn their wealth. Also, I have a problem with tax loopholes that are designed to only benefit the wealthy yet that are useless to the middle class.

(Side note: I think that federal and state income tax should be adjusted for cost of living per county. It is obscene that a San Francisco household should have to pay the same effective tax rate to someone in Fresno where cost of living is much lower. $300k in AGI for a married couple is a lot in many regions of the country and in others it is squarely in the middle class. Thus, income tax brackets should be adjusted for cost of living. I’m not sure if this could work, but it would make a lot more sense then the current tax system.)

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Jake wrote: “Sorry, but most of this applies to the 0.01% of income earners, not the 1%. Additionally, a lot of what you outline is misleading. I’ll address each section.”

While many of these tax breaks are most beneficial for the .01%, the .05% and yes even the 1% get more out of many of these tax breaks than people with middle class incomes. The super, super rich get the best tax breaks of all.

RE: The Rich paying 0% on Capital Gains Tax

Jake: I don’t know how you got 0% capital gains tax. Not only do the rich have to pay capital gains tax, but they pay it at a higher rate because of their income.

The really rich do not pay capital gains tax at a higher rate. How can this be? Most people who aren’t extremely wealthy have to work and work for pay. When we work, we generate income. This income is what defines our capital gains tax rate. The top capital gains rate for the wealthy is 20%. So how are some getting away with not paying any capital gains tax?

The super rich do not need to generate income. If an investor is in the 10% and 15% tax bracket for income, then s/he pays 0% in capital gains tax. This means that if someone has enough money to sustain them via investment growth and dividends, s/he never has to earn income and can stay in the lowest income tax bracket, thus withdrawing any dividends and gains on investments at a 0% capital gains tax rate.

Thus, my point is that capital gains tax rate should be the same for everyone, not based on income levels, so that way no one can cheat the system.

RE: Mitt Romney paid just 15% federal income taxes despite making way more money than someone in the top brackets

Jake: Yes, Mitt Romney paid 15% in federal income taxes, but most Americans making 50-75k paid 7.8%. Someone that makes 100-200 paid 12.1%. The kicker? The bottom 50% of income earners paid 0% in income taxes. It puts Romney’s 15% in context. These are facts.

This isn’t about the bottom 50%. Yes, in our society people who make money pay tax to support services for people who are unable to make enough money to live, true. But the actual problem here is not about the bottom 50%. It’s the fact that the middle class is disappearing due to loopholes like this only available to the super rich. If you make $100,000 a year (single filer) you will pay 21.18% of all of your income to federal tax. If you make $200k, you’ll pay 24.93% of your income to federal tax. At $300k a year, that’s 27.62% to federal taxes. But if you’re super rich and in one of these jobs where the loopholes are available, you can pay much less while earning much more.

RE: Home deduction tax benefit is much better for the rich than the middle class

Jake: “Yes, the rich enjoy the home interest deduction along with 67% of America. The rest of Americans can also deduct the full amount, while the PEASE limitation reduces the amount that the rich can deduct.”

True. However, the way taxes work, the wealthy are getting a much bigger benefit to purchase property over the middle class. If the wealthy haven’t taken advantage of the former loopholes, basic math tells us that the deduction for the rich is going to be greater than that for the middle class. “One of the unfortunate and largely unintended effects of structuring tax benefits as deductions or exclusions is that they tend to provide much bigger tax benefits to those in the highest tax brackets. For a wealthy taxpayer in the highest tax bracket—now 39.6 percent—a $10,000 itemized deduction, such as one for mortgage interest, results in $3,960 in tax savings. For a taxpayer in the 15 percent bracket, however, that same deduction is worth only $1,500.” (source) Yes, the PEASE limitation is helping this a bit, but the mortgage interest deduction still percentage-wise much greater benefits the wealthy over the average middle class person.

RE: Giving to charity to preserve family wealth

Jake: “This just doesn’t make sense. How can you knock giving to charity?”

Answer: Because “giving to charity” is not always actually giving to charity. For example, the Walton family, heirs and heiresses to the Walmart fortune, are using this loophole very smartly to preserve their wealth over generations. With a fortune worth $115.7B, the family is set for at least a few generations, and tax laws help them ensure this.

How is this possible? The Waltons and many other super rich families use a charitable trust that allows the donor to pass money on to heirs after an extended period of time without having to pay estate tax! If a donor locks up assets in charity trusts (CLATs) for a long period of time an amount set by the donor is giving away each year but whatever is left goes to a beneficiary TAX FREE. Just one of the charitable trusts would result in $2.2B for Walton heirs, without owing any tax on it. (source). While most people won’t have to pay estate tax anyway (your estate needs to be worth more than $1M before estate taxes begin to be levied), it is the super rich that the estate tax is designed for – to ensure that people aren’t just living off their family’s wealth and never paying a cent to support the government or working a day in their lives.

RE: Deduction for private jets

Jake: ‘Not many 1%’ers own private jets. That’s for corporate CEOs, professional atheletes and entertainers….many of the 0.01%”

True. This is probably relevant only to the top elite only. Nonetheless, it’s still a tax break the super rich enjoy.

RE: Fake-Out Agricultural Tax Credits

Jake: Anyone who owns a home can do this (67% of America), not just the 1%

Each state has its own rules on how individuals who own property can take tax credits for agricultural use. The point is not whether anyone who owns a home can take these credits, but how the credits are much more valuable for people who own expensive homes and properties. Another example of this – in NJ, fake farmers are costing the state millions of dollars. The Farmland Assessment Act of 1964, intended to preserve agriculture in NJ, is being used by millionaires, developers and anyone with at least five acres of land to slash their farmland tax bills by 98% — all they need to do is produce $500 in goods per year to qualify for tax breaks. For instance, one person used a cow to eat the home’s front lawn for a few months and then sold the animal, enabling the individual to take the tax break on their five acres. Even Bruce Springsteen takes this tax credit. While he pays $138k a year in taxes on his own home, he owns an additional 200 acres which he has a farmer come and grow a few tomatoes so he doesn’t have to pay a lot of tax on this land (only $4639 per year.) (source)

Thus this tax loophole doesn’t benefit 67% of America who own property, but only the super wealthy who own more than five acres of property (rules vary per state but generally this is designed to help the super rich fake farmers only.)

RE: Rental Property Tax Benefits

Jake: Anyone with a rental property can do this type of exchange, not just 1 percenters.

Again, you’re spot on Jake. Anyone can take advantage of the tax loophole which enables them to purchase rental property and do a like kind exchange to trade it for property worth the same or more without paying taxes. Now, only the rich can afford to do this enough for it to make a big difference. For example, as someone with $300,000 networth, I invest in real estate via REITs. When I sell a REIT I must pay capital gains tax on this REIT, even if I want to purchase another REIT. I cannot just trade this without paying any tax. Also, I could own rental property and do a like kind exchange, but with $300,000 total in networth I’m not going to be able to purchase enough property for this to really help. Since wealthy real estate investors can do this over and over again (there is no limit for how many times they can trade property without paying tax and taking deductions for depreciation of their owned properties on sale) in the long run they will only pay capital gains rates on the property sold last.

But if you’re really rich, you never have to sell this property when you’re alive! You can pass this on to your children tax free. The basis which your children will pay tax on upon sale of the asset is determined not by how much you paid for the property in the first place, but instead how much it was worth on the day you die. Assuming you were a very smart investor and used like-kind trades throughout your life, you could have significantly grown your real estate value over time, enjoyed depreciation deductions, and then pass on the property tax free to heirs who can sell it for the amount it’s worth on the day of your passing. Most people cannot afford to keep so much of their networth locked up in investment property, but the super rich can.

So, Jake, as you see, much of my points have to do with how these tax benefits mostly help the super rich. This may not be the 1% but at 1% you start to experience some of these benefits. Once you have a certain amount of money in your family, though, you can maintain it for many, many generations through these loopholes.

Taxes, Wealth

10 Tax Breaks That Only The Rich Enjoy

August 28, 2014 Joy 4 Comments

Ahh, what’s that smell? American Greed?

We 99%ers love to call out the 1%. Some get to the 1% with hard work and luck, but many are placed there due to being born into privilege and likely a sizable inheritance. Others weasel their way into wealth. Few can get there in a way that wouldn’t make some “kooobaya-type god”scream mercy. Regardless of how the 1% made it to the top of the fiscal food chain, they can enjoy a whole host of benefits staying there — private jets, beautiful women, more beautiful women, houses, yachts, and — last but not least — some really tricky tax breaks so they can just keep accumulating more and more wealth!

Here are 10 tax breaks that only the super rich enjoy. Read ’em and weep.

Income Tax, Smincome Tax
The rich don’t need your stinkin’ income. CEOs can come out and say they’re going to take a $1 salary and the masses think that they’re being just so damn humble and giving. Not so. While us lowly folk have to work and get paid salary to do things like eat and have a roof over our heads and pay for our kids piano lessons, the rich can take their heaping savings and put it into investments that compound over time. Good thing these folks are not actually earning any income because that means they can enjoy 0% tax rates on all of their capital gains. The best us lowly folk can do is attempt to put together an investment plan that eventually provides us with enough dividends and capital gains to also take out our money tax free, even if we never have an army of beautiful girls/men and/or private jets (source)
Taxes Are for Losers (AKA Poor People)
Some rich folk work in fields like investment banking, private equity management, or real estate partnerships. Not only do they get paid a lot off the bat for these roles in terms of total compensation, their pay is not in the form of that same lowly income you and I see deposited into our bank accounts every few weeks. These modern-day royals get to be paid in a “carried interest” which is – somehow – usually taxed as a capital gain instead of ordinary income. That means these richies are paying 20% taxes to the federal government on all of their earnings. Even Mitt Romney managed to pay 15% taxes for his great service to our country as head of Bain Capital (yea, aren’t you glad he didn’t become our president?) (source)
Home is Where the Cash Is
The government wants to encourage home ownership because this means the country is more stable, generally speaking. Thus, big brother provides tax incentives for home owners of all wealth levels (as long as you can afford a house.) However, the best writeoffs go to the super rich. The mortgage interest deduction lets taxpayers who itemize deduct the interest they pay on their home mortgages. The way the program is set up, the more expensive the home and the higher the homeowner’s tax bracket, the bigger that subsidy is. (source)”Less than one-third of taxpayers are able to take advantage of the deduction—it is restricted to those who itemize their deductions, a group that skews toward the upper end of the income distribution. Also, the benefit is tied to the marginal tax rate of the taxpayer and so has higher value to those with higher income. For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings.” (source)
That Foggy Definition of Charity the Rich Love
Oh, what wonder, a 1%-er is donating something to charity. That’s great, if genuinely done to help an organization, but often the reason for donation is not exactly out of good will. It’s horrible to say but many charities are corporate scams. Seriously. Let’s take a look at Walmart. The Waltons, owners of Walmart, are using “Jackie O” trusts to both give money to charity AND pass on money to future generations without paying estate taxes. Oh, and did I mention they’re doing this all through their own charity, The Walton Family Foundation? This is perhaps more disturbing than the other tax loopholes because wealth dynasties are why inequality is cemented into American culture. (source)What’s more, “generally, you can deduct the fair market value of property you donate to charity if you’ve owned it for more than one year and the property is used to further the charity’s tax-exempt function. Thus, the appreciation in value is untaxed forever. The tax law limits the annual deduction for gifts of appreciated property to 30 percent of AGI, but that still provides a gaping tax loophole.” (source)
Beam Me Up and Around and Around Scotty
Geez, private jets are just so damn expensive. But how else are the rich supposed to get from point A to point B? Not with the underlings, by god. There is a special subsidy for corporate jets which cost taxpayers $3 billion a year. Yes, a common tax trick and CEO perk is to pay for private jets under the guise of security (because what if a poor average flight attendant accidentally spilled coffee on their Prada suit during a turbulent flight???) If a benefit is classified as for security purposes the CEO will pay a reduced tax bill or no tax at all on the bene. (source)
Mooooooooooooooooooooooooooooo. Mooo. Mooooney
I feel like we should just let this tax write off slide for the sheer fact of it being so ridiculous. JK. This will make you want to go tip some cows. In states like New Jersey, Florida, Texas, Iowa, Colorado, Alabama and more, farmers can take a tax deduction for their service feeding our great nation. That is, even farmers that aren’t farmers at all. According to an article in The Nation, that’s what Michael Dell did with his second home—a suburban ranch in Austin. Because he hunted there periodically and maintained a “well-managed deer herd,” he was able to reduce the property’s 2005 market value from $71.4 million to an agricultural value of $290,000. That saved Dell—but cost Texas—$1.2 million. Florida has a well-known “rent a cow” program (I kid you not.) What is this cow business? To qualify for the tax writeoff, Florida requires a couple of cows or a herd of goats, which don’t have to be on the property all the time. So you have wealthy people paying next to nothing on property tax because they own lots of acres and can afford to rent a few cows. (source)
John Edwards and Newt Gingrich Walked into a Bar (and didn’t pay any tax)
This one is a doosey and surprise surprise it involves politicians again. Slime of the earth. Payroll taxes are supposed to be paid on income from work, with social security payroll tax paid on the first $113k in earnings (as of 2013) and medicare payroll tax paid on all earnings. Except S corporations, which are made up of a partnership of self-employed type folks, don’t need to qualify all their earnings as payroll, and thus it doesn’t need to be taxed. This one gets a bit complicated to explain, so just check out this writeup to get the full picture of how dishonest richies can get away with legal tax loopholes that only benefit the 1% (source)
- Newt Gingrich: In 2010, Gingrich Holdings, Inc and Gingrich Productions paid Newt Gingrich$444,327 in wage income while declaring $2.4 million as profits of the S corp. This allowed Speaker Gingrich to avoid $69,000 in Medicare payroll taxes. [Wall Street Journal Market Watch, 1/23/2012]
- John Edwards: Senator Edwards earned $26.9 million from his work as a trial lawyer in 1995. He paid himself a salary of $360,000 each year for four years and took the rest as distributions from his S corp. This saved Senator Edwards an estimated $600,000 in payroll taxes. [New York Times, 7/10/2004]
Selling a House and Paying Taxes? Yea, Right.
Even average American homeowners can take $250,000 of their home price increase tax free ($500,000 for married homeowners) which is a pretty good deal after years of fixing broken air conditioning systems and having termite genocide parties. But the real tax benefit for housing is only available to the super rich (surprise!) A 1031 Exchange, also called a like-kind exchange, enables real estate investors to trade the equity in one property to another property of equal or more value without having to pay taxes (yes, you heard me right.) The taxes will need to be paid eventually, but the investor, in the meantime, gets to reallocate their portfolio and you can still take a depreciation tax write-off on your properties that are being exchanged. There’s no limit to how many times you can do a 1031 exchange. Since the rich are doing this with their real estate investment property (you can’t do this with personal property, sorry 99%), when they do sell it eventually they’ll sell at the capital gains rate. (source)
Tax Breaks (i.e. Itemization) Seriously Favors the Rich
There are many different tax deductions available to take. But, of course, in order to take a deduction, you must itemize your taxes. While itemizing makes financial sense for high-income Americans, it does not for low ones. This means that deductions are mostly utilized by the rich. Only about one-third of Americans itemize their deductions, and they are mostly the well off. In 2010, only 29.3% of those making between $30,000 and $50,000 itemized, but 96.8% of those making $250,000-plus did. (source)
One Home is Just Not Enough
Speaking of itemized deductions, owners of two homes get to write the mortgage of their second one off as well, as long as they itemize. It turns out this tax benefit isn’t for folks who own tiny little vacation bungalows by the shore or middle-class lakeside cabins. Nope, the main benefactors are the super wealthy. Just to rub salt in the wound of us reg’ies, rich folk can DEDUCT THE INTEREST PAID ON THEIR LUXURY YACHTS (fyi that clink-clanking you hear is the sound of me kicking all the buckets in the world.) As long as these boats are equipped with sleeping quarters, a kitchen and a toliet they can deduct the mortgage debt on these “homes.” (source)