New IRS Data Leak Shows America's Wealthiest Individuals Regularly Pay Little to No Federal Income Taxes.

[abw0004 10,125]

Something I think many of you may not know is who the article is referencing.  Those people do not have a W2, which means any income they are pulling is from investments, not salary from their businesses.  It is an entirely different tax.  This article is a little misleading in how they are trying to get people to read it.  If they do not pull income from their investments, all they pay is a tax on any gains in the portfolio if it is not in a tax-advantaged account like an IRA, 401(k), or 403(b).  There will be tax when the money is withdrawn unless it is someone like Buffett who will donate all of his money.  Donations to qualified charities are not taxed.  Another thing for consideration, is to look at their taxes paid in the 2019 tax year instead.  Remember in 2020, the market took massive hits.  These (massive) losses can be carried over to the next year to offset any gains, thus no tax on gains up to and including losses.

 

21 hours ago, McLoofus said:

That's my thing. I don't understand why we're differentiating between sources of income. As if earning interest on interest somehow shouldn't count. 

Interest, even if it is reinvested is taxed as gains in the year it was made.  That is where these people are paying their current tax, just as an FYI.

Edited June 11, 2021 by abw0004

[CoffeeTiger 5,145]

I like this opinion article and feel it's relevant to the discussion here:

https://www.washingtonpost.com/opinions/2021/06/10/mad-about-how-little-rich-people-pay-taxes-heres-how-get-them-pony-up/

Quote

The tax system is working as intended. So if we want to tax the rich, here are some alternative options.

 

ProPublica’s bombshell report on leaked tax returns of the ultrawealthy has made people mad. They seem mad mostly at the rich, who paid little in income taxes as a share of just their income and virtually nothing as a share of their net worth. In some cases, actually nothing. Some billionaires — reportedly including the owner of this newspaper! — paid zero dollars in income taxes during a handful of years.

 

All as their fortunes swelled.

Fume all you want, but the tax system is working exactly how it was designed to. We’ve chosen not to tax “unrealized gains” as income — that is, we tax the increases on most assets only when and if those assets get sold.

 

And sometimes, not even then, if those stock holdings or gold bars or whatever get passed along to heirs first.

As a society, we could make different choices. There’s a long menu of options to wring more money out of the very rich, including some good proposals from President Biden.

Let’s start with options that are popular but somewhat problematic. Many on the left love wealth taxes, such as those promoted by Sen. Elizabeth Warren (D-Mass). She has proposed taking 2 percent annually of fortunes greater than $50 million (3 percent for wealth above $1 billion). While the idea polls extremely well, its constitutionality is questionable. The Supreme Court has struck down wealth taxes before; given the court’s composition today, a different result seems unlikely.

 

There’s also the thorny problem of assessing the value of very rich people’s assets every year. That’s easy for publicly traded securities (such as Tesla stock), but for more illiquid assets (a closely held business, art collection, intellectual-property rights to Taylor Swift’s song catalogue), valuation can be easily manipulated if no recent transaction has taken place.

Implementing an annual wealth tax is therefore likely to be an enormous boondoggle for professional appraisers, and to leave the Internal Revenue Service vastly outgunned.

Similar administrative headaches would occur if we annually “mark to market” the value of assets, another frequently proposed idea. This involves taxing not people’s wealth, per se, but taxing their capital gains according to how much their assets grew (or shrank) each year, even if those assets never got sold.

 

In addition to appraisal challenges, this policy would likely present political problems. New research suggests that Americans really don’t like the idea of taxing capital gains before a sale, viewing it as unfair. And what happens when rich people’s assets decline in value? If there’s a giant recession, and Facebook stock tanks, does Uncle Sam cut Mark Zuckerberg a check?

So let’s talk about some more promising ideas.

One, which Biden has endorsed, is raising the corporate income tax rate. If corporate income taxes are primarily paid by shareholders — as economists generally believe — that means raising corporate rates would effectively increase the tax burden on the Warren Buffetts of the world.

We could also impose a national consumption tax. Right now, billionaires can fund lavish lifestyles by borrowing at low interest rates against their stock holdings and use this untaxed money to fund things such as mansions or yachts. A consumption tax would hit such purchases.

Consumption taxes tend to be regressive, though, so other policy changes would be required to prevent hurting the poor.

Then there’s Biden’s proposal to raise the top tax rate on capital gains, and more important, to change when such taxes get triggered.

Right now, rich people can bequeath enormous estates to their heirs tax-free (up to a certain amount), and any gains their stocks or other assets have accrued over their lifetimes get wiped out at death as though they’d never happened, at least for tax purposes. Under Biden’s plan, however, the tax code would treat gains above a certain threshold as “realized” whenever the owner dies or otherwise transfers the asset to someone else. When either event happens, capital gains taxes would be due.

Biden’s scheme would leave in place current incentives to hold on to assets as long as possible, which creates some distortions. But this “deferral benefit” could be addressed by basically charging interest for all the years a person held on to stock before dying, or either selling or gifting it. This idea, sometimes called a retrospective capital tax, was proposed some 80 years ago by Nobel laureate William Vickrey and has been developed further since.

These kinds of changes would go a long way toward making sure those who live off their wealth pay their “fair share," just as regular wage-earners do. They wouldn’t guarantee that every billionaire’s fortune gets taxed, particularly if we’re unwilling to eliminate tax benefits for charitable giving. There are other ways for the well-heeled to legally duck the Tax Man, too. That’s why adding a few different policy changes would be helpful, if the goal is to get the richest Americans to pony up.

“The tax code is sort of a Swiss cheese approach,” says University of Chicago tax law professor Daniel Hemel. “So, let’s add some more layers of cheese.”

 

[McLoofus 35,182]

9 minutes ago, CoffeeTiger said:

I like this opinion article and feel it's relevant to the discussion here:

https://www.washingtonpost.com/opinions/2021/06/10/mad-about-how-little-rich-people-pay-taxes-heres-how-get-them-pony-up/

 

Pretty easy to understand for a dummy like me. I'm curious to hear counter arguments.

[abw0004 10,125]

44 minutes ago, CoffeeTiger said:

I like this opinion article and feel it's relevant to the discussion here:

https://www.washingtonpost.com/opinions/2021/06/10/mad-about-how-little-rich-people-pay-taxes-heres-how-get-them-pony-up/

 

In theory it makes it sound like a good idea but the objective would never get accomplished.  As it sits, every person has an $11,700,000 of exemption for their estate to pass on to their children, estate tax free.  There is a sunset provision that would reduce this in 2025 if no action is taken.  From what I have been told from trusted people in my circle the number will most likely be $6,000,000.  It would need the republicans to control both the Senate and presidency to extend this provision out to remain at $11,700,000.

In a watered down sense, my job is to minimize the estate tax and maximize this exemption.  You can use this exemption by creating an Irrevocable GST (Generation Skipping Trust), which your children are beneficiaries, and make gifts to it.  Once something is gifted, you cannot get it back, and it is out of your estate, so you are no longer estate taxed on it.  It gets the name GST because it skips multiple generations of estate tax.  In Georgia it skips for 360 years.  No one can get into that trust.  That includes divorce courts, estate tax, or legislation.  So Biden's rules will not affect any planning already done.  This is why I have been so busy, because all of my clients, in fear of the exemption going down with Biden, are using all $11.7 million up now before it goes away.  These wealthy families most likely have this planning done already.  This also includes life insurance.  Set up an ILIT, use the premiums as gifts and it will produce a massive death benefit that does not need to be gifted as it is out of the estate already.

I say all of this in the sense that I hope it is educational and something everyone takes advantage of.  I just gave advice I normally charge a hefty fee for.

If this matters, I do not identify as Republican either.  I am an Independent.  So I am not out to quash what these Democrats are trying, but frankly, they have no idea what they are doing when it comes to tax.

[tomcat 569]

On 6/9/2021 at 9:31 AM, abw0004 said:

So I will speak on this because it is exactly what I do for a living.  I deal with tax on the wealthy everyday and help families reduce their estate tax as much as possible.  The tools the ultra rich families use are available to everyone.  It isn't that you have no way to access them.  I don't like the narritive you see in the news that the ultra rich are trust fund babies that get away with everything and had money fall into their laps.  This is their business they built from the ground up and want to be able to pass their business on to their children without losing 40% of the company to the IRS, after they already paid tax on it once before.

What you see above is owners of companies using the losses they incurred up to the last three years to offset any gains or income.  You have the ability to do the same if you took a loss in your advisory account.  If you think about it, that makes sense because you took a loss on something, so why pay tax on something of value that is no longer there.  These people also made charitable contributions, which are write-offs.  Lastly, any business expenses are write-offs.  For example, I am traveling today to Savannah to meet with some of these clients.  I can write off my meals, hotel, and miles on my car.  BUT, I only get back 50% of what I spent.

All of these tools are available to you, but it just seems like a scam to these ultra-wealthy because their numbers are very big.  Your CPA is probably doing these things for you (minus the estate tax if your estate is less than $11.7 million) and you don't even know it.

OK…I think all agree these practices are legal. However, are they fair and reasonable? The notion that the Uber wealthy can pay less than 5% federal tax while the rest of us pay 14%+++ is disgusting. The tax code is the absolute best the wealthy can buy.

 

[abw0004 10,125]

43 minutes ago, tomcat said:

OK…I think all agree these practices are legal. However, are they fair and reasonable? The notion that the Uber wealthy can pay less than 5% federal tax while the rest of us pay 14%+++ is disgusting. The tax code is the absolute best the wealthy can buy.

Remember it is just deferring the tax.  Tax will be paid, unless it is donated.  And the wealthy have the estate tax to deal with as well.

[abw0004 10,125]

Man, @icanthearyou really does not like me

[bigbird 60,576]

1 hour ago, abw0004 said:

Man, @icanthearyou really does not like me

Doesn't understand you

[abw0004 10,125]

3 hours ago, bigbird said:

Doesn't understand you

 

 

Edited June 13, 2021 by abw0004

[cole256 17,084]

On 6/10/2021 at 10:56 AM, McLoofus said:

I haven't attempted to explain the inequity of taxation. Nor have I suggested that the same loopholes I might take advantage of shouldn't also apply to wealthy people.

You said Bezos pays more in taxes than a poor McDonald's worker. That's obviously true, even if he only pays .000000000000000001% on whatever source of income you choose. What I asked you is, does he pay a higher percentage of his income in taxes? I'm not sure why you're bringing in loopholes and tax acts and such. I'm not asking for why. I'm only asking for if. It seems you either don't know or don't wish to answer. 

Lol came in and called everybody dumb and he's the specialist the preceded to offer absolutely nothing. Gotta love that.😂

[augolf1716 21,248]

18 hours ago, abw0004 said:

Man, @icanthearyou really does not like me

Consider it a blessing...............

[gr82be 14,449]

18 hours ago, abw0004 said:

Man, @icanthearyou really does not like me

He's like Mikey, the Life cereal kid. He hates everything. Thanks for your input and explanations. 

Edited June 13, 2021 by gr82be

[TexasTiger 12,969]

On 6/8/2021 at 1:41 PM, SLAG-91 said:

This falls into the category of "don't hate the player, hate the game." 

I imagine most of us take every legal deduction possible, at the minimum, and more than a few, ahem, "cut corners." Wealthier people have more resources to turn over those stones so that they can keep more of their money, and have means to cover their tracks when they do shady stuff...been that way for a looooong time.

If I were in their shoes, I'd take every deduction I had afforded to me by the tax code, too. Anyone who wants to pay more tax than they are obligated to pay is free to write a check to the IRS at any time.

The players in this case get to greatly influence the rules of the game thru lobbying the rule makers.

[TexasTiger 12,969]

On 6/9/2021 at 9:31 AM, abw0004 said:

So I will speak on this because it is exactly what I do for a living.  I deal with tax on the wealthy everyday and help families reduce their estate tax as much as possible.  The tools the ultra rich families use are available to everyone.  It isn't that you have no way to access them.  I don't like the narritive you see in the news that the ultra rich are trust fund babies that get away with everything and had money fall into their laps.  This is their business they built from the ground up and want to be able to pass their business on to their children without losing 40% of the company to the IRS, after they already paid tax on it once before.

What you see above is owners of companies using the losses they incurred up to the last three years to offset any gains or income.  You have the ability to do the same if you took a loss in your advisory account.  If you think about it, that makes sense because you took a loss on something, so why pay tax on something of value that is no longer there.  These people also made charitable contributions, which are write-offs.  Lastly, any business expenses are write-offs.  For example, I am traveling today to Savannah to meet with some of these clients.  I can write off my meals, hotel, and miles on my car.  BUT, I only get back 50% of what I spent.

All of these tools are available to you, but it just seems like a scam to these ultra-wealthy because their numbers are very big.  Your CPA is probably doing these things for you (minus the estate tax if your estate is less than $11.7 million) and you don't even know it.

It “seems” like a scam, because it is. Your livelihood depends on perpetuating the system you’re critiquing. You’re rewarded by it. Even Warren Buffet knows it’s BS.

[homersapien 11,401]

It's the "Golden Rule" - those who have the gold make the rules.

[abw0004 10,125]

19 hours ago, TexasTiger said:

It “seems” like a scam, because it is. Your livelihood depends on perpetuating the system you’re critiquing. You’re rewarded by it. Even Warren Buffet knows it’s BS.

I understand it may come across that way, but in reality my livelihood does not depend on it.  In fact, I would actually make more money if the exemption went down.  If the exemption goes down, then more work is needed and my fee goes up. In turn, more life insurance is needed to cover the tax bill, which is a bigger commission on top of the fee.  I should be on your side, but I learned long ago from my father to always do what is best for my client, not myself.

I am saying what I am saying because I understand the estate tax system inside and out.  These reporters do not.  In fact, without the exemption, your children would even have to pay a tax when you die.

Here is how I look at it:  My father has his own company, like I am doing.  He came from a farming family in Indiana and was the first person to go to college (Southern Miss).  He had to be a welder/electrician building battleships in Gulfport to pay for college because he was very poor.  Lost half of his hearing doing it.  After he graduated he got a job working with GE Medical because they would pay for him to get his masters degree.  After this he wanted to start his own company after being tired of moving around all of the time.  To do this he had to use his house as collateral as well as all of his savings with a wife and newborn (me) that depended on him.  He worked tirelessly while other friends were at the bars, leasing expensive cars, and going on vacations they really could not afford in the first place.  He would tell me my mom would be stressed out because they could not afford to buy milk.  Now his business is incredibly successful.  All because he literally risked everything he owned to start this business that he hopes to give to me should I continue to build my own practice up and prove I earned it.  Now the government wants to take 40% of this company when he dies, after he paid all of the other taxes on it, because those friends of his who spent all of their money on vacations they couldn't afford and cars they could not afford think they need a bigger tax break than him because they think it is unfair he is successful now.  How is his desire to not be punished for risking everything, when others did not, to form a successful business that created jobs a scam?

The problem is the media portrays the wealthy as trust fund babies and CEO's who did nothing to earn their money and all they do is buy houses and cars.  In reality, they are self-made business people who took risks and bets on themselves that they could be something.  Those same people who provide jobs to others and are incredibly charitable.  A lot of the time, they do not even want their children to have any of the money until they are 35 or older.

Edited June 14, 2021 by abw0004

[AuburnNTexas 7,165]

I totally understand that until you sell something you haven't made any money, yes your investments can gain book wealth but as the article explained they can also loose money but again only if you sell at a loss. My issue is not with that part I do think that at some point tax has to be paid on investments if added to a trust so that wealth that keeps going up. I understand that Tax relief is provided when it is a cost of business. If you pay somebody or buy a new piece of equipment it reduces your net. My issue is not with Tax deductions it is with Tax credit's. A tax credit goes directly against the tax you owe which goes a long way towards making businesses and individuals tax exempt. As an example of before taking a tax credit you owe $20,000.00. Theoretically you could have enough Tax credit's so you don't owe anything. I would add a feature in Tax Law that would limit the amount of tax credit that can be taken to something like no more that 25% of total tax bill. In this example you would pay $15,000 even if you had enough credits to not have to pay anything.  When dealing with large companies this could add a good bit of revenue to how much a  company would pay in Taxes.

We have to be careful if we try to reform tax law as it can have unintended consequences that could potential hurt the everyday person.  A large proportion of the US population has a 401K if we try and start taxing increase in investments as the value of a person's 401K goes up their tax load would go up. The only way you could afford to pay extra tax would be to sell some of the 401K investments which then is a double whammy a fee for early withdrawal while reducing what you will have when you retire.

Currently we Tax income not wealth accumulation which is not income until it is sold. My point is it is hard for me to believe that people buying homes, cars, boats, going out to eat in restaurants, buying clothes, etc can show that they had no net income so they pay no personal taxes.  How do you have money to buy these things if you have no income?

[CoffeeTiger 5,145]

Plus Capital Gains Tax rates are much lower than income tax rates, so wealthy people have a strong tax incentive to limit their income wages and live off investment earnings. Jeff Bezos only ever earned a salary of $82,000/yr from being the CEO of Amazon. 

 

[abw0004 10,125]

3 hours ago, AuburnNTexas said:

I totally understand that until you sell something you haven't made any money, yes your investments can gain book wealth but as the article explained they can also loose money but again only if you sell at a loss.  Each year you have to pay taxes on any gains, whether sold or not.  Once taxes are paid, your basis in your account goes up.  Same with a loss that year, it is either used to offset a gain somewhere else, or carried over to the next year which is what we are seeing for the 2020 tax year.

My issue is not with that part I do think that at some point tax has to be paid on investments if added to a trust so that wealth that keeps going up.  Once a gift is made, it has to be irrevocable and cannot be reversed.  When a gift is made you use your exclusion up to $11.7 million per person.  Anything over that you pay tax that tax year.  Once it is in the trust and out of your estate, you do not pay taxes on those investments moving forward because you no longer own it, if that makes sense.

I understand that Tax relief is provided when it is a cost of business. If you pay somebody or buy a new piece of equipment it reduces your net.  It should remain the same as you now have an asset (piece of equipment) that you provided cash for.  As that asset depreciates if used for business though, you can write off the depreciation.  

My issue is not with Tax deductions it is with Tax credit's. A tax credit goes directly against the tax you owe which goes a long way towards making businesses and individuals tax exempt. As an example of before taking a tax credit you owe $20,000.00. Theoretically you could have enough Tax credit's so you don't owe anything. I would add a feature in Tax Law that would limit the amount of tax credit that can be taken to something like no more that 25% of total tax bill. In this example you would pay $15,000 even if you had enough credits to not have to pay anything.  When dealing with large companies this could add a good bit of revenue to how much a  company would pay in Taxes.  The thing is though for large companies, 25% is millions of dollars.  Remember, companies would rather have a gain than a loss.  In my example about my operating expenses, I can write off 50% of my travel expenses against income, but it is only 50% of every dollar.  I would rather have the dollar back than 50 cents.

We have to be careful if we try to reform tax law as it can have unintended consequences that could potential hurt the everyday person.  A large proportion of the US population has a 401K if we try and start taxing increase in investments as the value of a person's 401K goes up their tax load would go up. The only way you could afford to pay extra tax would be to sell some of the 401K investments which then is a double whammy a fee for early withdrawal while reducing what you will have when you retire.  This is a big thing for Bernie Sanders.  He wants everyone's 401(k)'s taxed.  This would ruin a lot of people's retirements.  These plans were created to try and motivate people to save for retirement.  If you tax them, it only creates more issues.  One of the reasons why all of Bernie's tax proposals get shot down since he has been in office.  He doesn't truly understand tax law.

Currently we Tax income not wealth accumulation which is not income until it is sold. My point is it is hard for me to believe that people buying homes, cars, boats, going out to eat in restaurants, buying clothes, etc can show that they had no net income so they pay no personal taxes.  How do you have money to buy these things if you have no income?  They have no W2 income, but income from investments.  That is a long term capital gain typically.  It is different from the article above.  Remember also, 2020 was a bad year for the market.  They most likely had losses to offset gains like I did for my portfolio.

Lastly, regarding your comment about what they are buying: unless it is the ultra wealthy, don't believe what you see on Instagram.  I have learned that people are truly wealthy don't try to convince you they are.  Most likely that Ferarri you see on Instagram is leased.  I will give you an example.  I have a client in the oil refinery business.  Worth hundreds of millions.  Want to know what car he drives?  2009 Chevy Suburban.  He simply doesn't want a target on his back.  Here in Atlanta, there is a neighborhood near me called Country Club of the South.  Multi-million dollar homes.  That neighborhood went bankrupt in 2009 because those people could not actually afford those homes.

Hope this helps!  

 

Edited June 14, 2021 by abw0004