Unknown: The more money you
make, the more you have to pay in taxes, right? Well, not
always. Here in the US, the more you earn, the bigger percentage
cut the government withholds from your pay. But here's the
thing, the ultra-wealthy typically take advantage of
rules in the tax code, which enable them to lower their
effective tax rate. The rich are different from you
and me, as the old saying goes, in large part because the
sources of their income are different. Just take the case of
billionaire Warren Buffett. He often points out that he pays
less taxes on a percentage basis than his other employees,
including his secretary. The reason? Well, most of his wealth
comes from his stock holdings, not his annual salary. The great
thing about stocks is that you aren't taxed till you sell them.
And even then, the taxes are typically lower than the rates
on wage income. So if you ask people, you know, what bothers
you most about the tax code, complexity is a common answer,
but also the feeling that the wealthy don't pay their fair
share, or the feeling that corporations don't pay their
fair share. In 2018, Amazon famously pulled in over $232
billion in global revenue, and yet, its federal tax bill was
$0. And in fiscal year 2020, at least 55 of the largest
corporations in america, including FedEx and Nike, also
managed to pay no federal corporate income taxes. There's a great Supreme Court
case with Judge Hand many years ago, that it's not the taxpayers
responsibility to pay the most taxes that he can, it's the
taxpayers responsibility to pay the least taxes that he can.
There's even a rule within the IRS code that if you want to pay
more taxes, you can write a check to the United States
Treasury, and you can take a tax deduction for that. But some experts say tax breaks
are designed to reward the taxpayers who are helping to
pump up the economy. Individuals who are not again
contributors in terms of real estate and businesses, they
don't get tax benefits, but it's because they are not
contributing to the economic growth at a larger scale. So how exactly are the country's
biggest earners using the tax code to avoid paying taxes? To
understand how the wealthy take advantage of the tax code, you
first have to look at where all that wealth comes from. The biggest loopholes arise when
you have assets. Most Americans don't have assets, all they are
dependent upon is their income from their salary from their
employer. So if you have someone who has assets such as business,
and real estate, again, they are unlocking different areas of the
tax code that most individuals do not get to explore. you can think of someone's
wealth as being comprised of separate assets which fit into
one of three different tax buckets: taxable, tax-deferred,
and tax free. If your only form of income is your annual salary,
then all of your wealth just fits into the taxable bucket.
But the rich also tend to diversify into other types of
assets and investments that the tax code doesn't consider to be
taxable income. There are individual retirement accounts,
some of which are not subject to federal taxes, and then you have
investments like stocks that fit into the tax-deferred bucket. If
the value of your stock portfolio goes up, you don't owe
tax on those gains until you realize that gain, a.k.a not
until you sell that stock. And even when you do so, the tax
rate is typically lower than the rates on wage income. Capital gains can be avoided in
life, and also largely avoided in death. And so that's highly
advantageous to high-income, high wealth people. Capital gains taxes also apply
to bonds plus tangible assets. So think things like real estate
or cars and boats. And with the right tax planning, you can time
it such that you only realize those gains during the fiscal
year when you have big capital losses to offset that gain. You
can also skip the tax entirely if you pass that appreciated
portfolio onto your heir when you die. Plus owning property
opens up higher earners even more ways to chop down their tax bill. If you own real estate,
you can now deduct things as depreciation, real estate taxes,
property taxes. Even if you are not investing in real estate to
get rental income, even if it's your primary residence, you can
itemize your tax deductions on a Schedule A which can also
lowerly affect your tax liabilities. On the other hand,
if you do have rental properties, you can take
advantage of depreciation your expense related to your real
estate properties and earn some extra income while paying
minimal tax on that additional income that you are earning. And these strategies are just
the tip of the iceberg. There's a whole patchwork of ways that
can drive down that annual tax bill.
There's not some magic deduction or magic credit that people
overlook and once I tell you, you're going to get a $10,000
refund, what there is a myriad of rules, opportunities and
options to lower your taxes. I'll give you a simple example.
There's almost 12 different tax breaks for higher education,
whether it be the tuition and fees deduction, 529 plans, where
you can put money in an account and have it grow tax free. Borrowing against the value of
real estate or borrowing against the value of insurance policies.
For example, you can take out a life insurance policy with a
high cash dividend, and then borrow against that from a bank.
The bank sees that as an actual asset and may loan up to 90% of
the value of that life insurance policy. That loan is effectively
income to you. But in the tax code, it's not considered income
or a capital gain. So it's tax free. So there's these kinds of
techniques that can be used if you have a lot of income and a
lot of assets, they are just not available to ordinary people
that don't have that kind of disposable income. In 2013, many time Grammy winner
Lauryn Hill was sentenced to three months in prison, three
months of home confinement, plus a $60,000 fine for not reporting
more than $2.3 million in income. She isn't alone. Some of
the biggest names in Hollywood have had serious run-ins with
the IRS for failing to pay their fair share of taxes. To be
clear, these are all examples of tax evasion, which is illegal,
not to be confused with tax avoidance, which is legal, even
if it is deemed unfair by large swaths of the population Tax evasion is illegal and is
actually punishable for up to 5 or 20 years in prison. And the law is pretty black and
white. There may be some new greyness on things like
cryptocurrency, you know, and other new innovations in the
world. But most of the time you know it when you owe it. And I
can certainly tell whether you owe taxes or not on a situation.
But when people come in with fabricated dependence, you know,
made-up deductions, phantom partnership losses, that's when
you get into invasion and evasion's the line crosser. Those sophisticated tax
strategies that we just talked about, they are all totally
legal ways to avoid paying more taxes than you absolutely must. Tax avoidance,
on the other hand, is utilizing the tax code to benefit you in
the way that is legal. So if there is a deduction for you
having a dependent, or you being able to expend something through
a business, as long as you're following the tax code in the
guidelines, you can take these tax positions. Thanks to lax enforcement by the
IRS, tax avoidance by the top 1% of taxpayers could exceed $5
trillion by 2029, according to former treasury secretary
Lawrence Summers. This same report found that the top 1%
account for about 70% of underreporting. So why is it
that the country's top earners also tend to be pros in the
arena of tax avoidance? Experts tell us a lot of it comes down
to tax planning. Wealthy individuals tax plan,
most Americans don't have a tax plan. And a tax plan is going to
encompass the CPA or tax accountant to go into the new
stimulus package or new tax reform and actually look at how
they can use the new changes in the code to benefit their
clients. These wealthy individuals have that guidance
throughout the year to get them to a more reasonable position by
year-end. A tax loophole is a provision in
the tax code that allows people to reduce their taxes to a point
below that intended by the lawmakers. In other words, it's
a technicality that lets the filer avoid a law without
directly violating it. Not everyone likes the connotation. Yeah, loophole is kind of a bad
word. You know, I'm not even sure what loophole means because
it's either legal or it's not legal. And if it's legal, then
it's not really a loophole. I would put forth it's a best
practice. And what I would tell you some
of the best practice, not just high income earners, but any
smart savvy taxpayer is to take advantage of all the tax rules
in the law. Once embedded in the tax code, it's pretty difficult
to get rid of a tax loophole. Each one not only benefits
somebody by saving them money in their taxes, but it also
typically has an army of lobbyists backing it up. Sometimes they're not partisan,
because they are more about protecting a given economic
sector, or even specific businesses. And that has to do
more with the locale. It might be more about what parts of the
country, what states, what congressional districts have a
certain economic sector that's very important, Essentially, the US tax system
creates an incentivized system for those who aspire to achieve
wealth. And here's why. You get tax credits for having a
business or having real estate. In that act, you are creating
opportunities to employ people or creating opportunities to
house people. Unemployment and homelessness are two of the
major concerns for any government. So why not give tax
incentives to those who are going to assist in creating a
way to aid these issues? So if you close out tax loopholes and
tax incentives, we don't know what the outcome would be,
because this can potentially discourage individuals who are
contributing to the vast growth of our economy to not make those
contributions at a more accelerated rate. Despite the quagmire of
opposition, the question as to whether or not to close
loopholes often pops up in elections and with new
administrations. Just take the Biden White House, the President
is taking aim at some pretty popular loopholes in the tax
code. Though it remains to be seen whether he'll succeed
Title: how people use the tax code approved by Congress to pay taxes
You can’t write off your home generally speaking since they changed the rules. They need to update this video.
Does it bug anyone else that people always call out that a business didn't pay any income taxes on their "profit"...?