Why do the rich pay so low taxes?
If you’ve been following the news, you may know there is some outcry over President Joe Biden’s plans to impose higher taxes on the wealthy. Not only is Biden looking to raise the top marginal tax rate from 37% to 39.6%, he’s also looking to raise the long-term capital gains rate to 43.4%.
In fact, it’s the latter move that might actually have the biggest impact on wealthy taxpayers. See, it’s a point of contention among some lawmakers that the ultra-rich manage to get away with paying a relatively low tax rate on their income. Here’s how they get away with it – legally – and why Biden is looking to change it.
It’s all about capital gains and dividends
It is estimated that the 25 richest Americans end up with a lower tax rate – 15.8% of adjusted gross income – than many ordinary earners. In fact, billionaire investment guru Warren Buffett has long criticized the tax code for favoring the wealthy, pointing out that it enjoys a lower tax rate than its secretary.
Now, for clarification, when we talk about the rich who pay less tax than your typical wage earner, we are talking about taxes. rates, not real taxpayer money. Still, the uber-rich are able to minimize their tax burden for one key reason: the bulk of their income does not come from wages. It is more about investments.
Many high net worth individuals earn most of their money through long-term capital gains and eligible dividends, both of which are taxed at a much lower rate than ordinary income. As mentioned earlier, the top marginal payroll tax rate is currently 37%, which Biden is looking to raise. Meanwhile, eligible dividends and long-term capital gains have a maximum tax rate of 20%. This means that a person earning $ 1 million in capital gains and dividends would only pay the IRS 20% of that amount instead of 37%.
Obviously, that doesn’t suit Biden, and so he’s looking to raise taxes for long-term capital gains – but only for taxpayers with annual income over $ 1 million. If his plan comes to fruition, the rich will begin to enjoy fewer tax breaks.
But if you are an average employee, you can still benefit from a better tax rate on capital gains and dividends. And that’s why it pays to stock up on stocks, both for wealth creation purposes and for the tax benefits that this entails.
Dividend stocks, for example, are a great way to supplement your income in a tax-efficient way. Of course, you could go out and get a side stampede, but then you will be taxed at the highest rate that applies to you based on your total income. But if you invest in dividend-paying stocks, you’ll receive taxed quarterly payments at a much lower rate.
In fact, 20% is the High tax rate that applies to long-term capital gains and dividends. If you are an average employee, you will only pay 15%. And if you earn less, you won’t pay any tax.
It pays to copy the rich
Right now, the rich get away with paying a relatively low tax rate on their total income. Whether it changes for them or not, you have the opportunity to employ the same tactics and take advantage of the tax savings that come with it.