These 5 hilariously ridiculous rules are why our tax system favors the rich.
Since the first federal progressive income tax was introduced in 1913, most Americans have fairly assumed that, come mid-April, the more money you earn, the more money you pay.
Rage! Photo via iStock.
But, oh boy, does it ever not work that way.
Examples of stupendously wealthy people paying hilariously low percentages of their income in taxes aren't hard to track down. See, for example, Warren Buffet paying a lower tax rate than his secretary or Donald Trump paying an effective tax rate of 25% in 2005 — far lower than the top marginal rate that year of 35% — despite earning $150 million.
If the tax code had been designed by, say, a coalition of teachers, construction workers, and fry cooks, things might be different. Unfortunately, the laws determining who pays what and why are written by members of Congress, who, as of 2012, had a median net worth of just a wee bit over $1 million. From their perspective, it's not hard to see that "How can I structure the tax code to make buying gas and going to the doctor a little more affordable?" might be a less pressing question than, say, "Should solid gold busts of Ayn Rand be deductible?"
To be sure, many rich people do pay more in taxes than middle- or working-class Americans, just less more than they might otherwise. And it's hard to blame the wealthy for taking full advantage of a system designed to benefit them. Don't hate the player, the saying goes, hate the game.
The Game probably pays a lower effective tax rate than you. Photo by Eva Rinaldi/Flickr (cropped).
But the game, such as it is, is rigged (SAD!).
So while most of us prepare to part with around a third of our hard-earned cash trying to decide if it's legal to write off as a business expense the $13.79 in tissues we bought to wipe away our tears, here are some of the rules that make it easier for the wealthy to play.
1. There's a tax break for vacation homes.
Let's say you live in a tiny apartment in a major American city, paying your landlord hundreds, or even thousands, of dollars a month to sleep in a glorified coat closet. You typically don't get to write off your rent on your federal taxes.
Your rent. Photo via iStock.
But if you were among those privileged enough to have the means to buy a house or condo or downtown triplex with a sweet view, you would get to deduct the interest you'd pay on your mortgage.
"OK sure," you might be thinking, "People who can buy houses are generally doing better financially than those who can't, but there are a lot of homeowners in America, and I hope to be one someday." And that's true, so far as it goes.
If you're really doing well, however, one house might not be enough. Sometimes you just have to spring for that little fixer-upper in the Poconos or that sprawling beach compound in the Outer Banks or that $90-million condo on 5th Avenue.
So close to the Apple Store! Photo by Andrew Burton/Getty Images.
In that case, you get to deduct the interest on the mortgage for your second house too!
As far as tax breaks that favor the already-pretty-damn-favored are concerned, the second home deduction is, alas, one of the more egalitarian, as it advantages both the only-sort-of-rich and the ridiculously rich — and you can only write off a total of $1.1 million in debt. Furthermore, the rule doesn't apply if you're so rich you just buy the house outright, nor does it apply to the third, fourth, ninth, and 12th homes owned by your average Gates, Bloombergs, and Zuckerbergs.
But the fact remains that taking out mortgages on more than one house gets you federal tax relief, while renting a studio apartment, mobile home, or infuriatingly twee tiny house doesn't.
Thanks to the U.S. tax code, it owns to own.
2. If you're rich enough to buy a yacht, you can probably write off a big chunk of it.
What makes a house a home? A cozy reading nook by the fire? Happy memories? The love and affection of all those you hold near and dear?
According to the U.S. tax code, if you can eat, sleep, and pee in it, it's a home — which means that this:
Photo by Myrabella/Wikimedia Commons.
...counts as a home, making it eligible for the mortgage interest tax break.
Some politicians have tried to exempt yachts from the second home deduction in recent years. It hasn't happened yet, partly because there are an absurd number of ways to get out of paying your full share of taxes on your yacht. Some states go out of their way to make superboats more affordable to your average Koch brother, DeVos sibling, or Soros quintuplet by capping the amount of sales tax you have to pay on them.
(L-R) George, Brad, Benghazi, Obamaphone, and #HillaryDid9/11 Soros. Photos by VCG/Getty Image, Spencer Platt/Getty Images, Eric Piermont/AFP/Getty Images, Sean Gallup/Getty Images.
Even better, if you rent out your yacht to slightly less wealthy people some of the time, you can usually deduct the whole purchase price and some of the insurance and maintenance fees as a business expense.
Pretty sweet! You should probably get a yacht!
3. While people who earn high salaries pay more in income tax, many wealthy people make a lot of non-salary income, and that's taxed at a lower rate.
If you're a single person making $1 million in salary, you're paying the top federal income tax rate — which for 2016 means 39.6% on every dollar over $415,050. That's way lower than it was in 1944, when the top rate was a whopping 94%. It's even lower than just over 30 years ago during the early years of the Reagan administration, when the top earners were paying 50%. Still, it's a solid chunk of change. Mercifully, for many super wealthy Americans, only a small portion of their annual income comes from working at an actual salaried job.
Enter capital gains!
"Money?" "Money." "Money money." "Money?" "MONEY!" Photo by Drew Angerer/Getty Images.
The best part about already having a buttload of money is that your money can make you even more money. If you're rich, you can take the cash you already have and invest it — in stock, or real estate, or apps called Moob that deliver fish bones to elderly Methodists, or what have you. And the best part? The cash you make when your assets post a gain is taxed at a mere 15-20%. That means if your trust fund does well, or if your 15th home increases in value, you might pay a lower tax rate on that gain than a nurse's aide pays on her $18/hour salary.
If that tax rate seems unfair, then you obviously haven't heard about the Newtian Pository. It's a philosophical concept I just made up that means "hahahahaha screw you and your 'job' that pays you a 'barely living wage.' If you want to get ahead in life, stop crying and own a landfill, or a Monet, or a bunch of Google, you dingbat!"
4. Rich people who own a lot of stock don't have to pay taxes on it if it increases in value — as long as they die before selling it.
Teddy is survived by his son Teddy Jr., his fifth wife Polankia, and a $75 million portfolio. Photo via iStock.
This is called "step-up in basis," one of those purposely complicated phrases used to obscure a pretty simple concept that would send poor people in the direction of the nearest flaming pitchfork store if anyone ever decided to, you know, actually explain it clearly.
So I'm gonna try to do that, by way of a totally hypothetical example.
Imagine you're a hard-charging New York City real estate billionaire type — "Ronald Bump," let's say. You buy 100,000 shares of stock at $1/share. To do this, you lay out $100,000 — an entire life savings for some, but chump change to a member of the Bump dynasty.
Let's say you, Ronald Bump, get lucky, and over the next 30 years, the stock increases in value to $100/share. Your $100,000 has magically become $10 million! If you sell it, you'd net a cool $9.9 million — but you'd pay taxes on it (albeit at the previously mentioned, already ludicrously low capital gains rate), leaving you with a mere $7.4 million or thereabouts.
But let's say you don't sell, and one day, when you're out grabbing a caviar bagel with gold leaf cream cheese, you get hit by a bus.
The Bus of Tragedy. Photo by Adam E. Moreira/Wikimedia Commons.
The bus really does a number on you, flattening your legs, rib cage, and most of your vital organs. Then, trying to determine the cause of the light whump that momentarily inconvenienced its passengers, the bus backs up, pancaking your head. Finally, seeing no cause for special concern, it speeds away, running you over a third time, knocking your body into a ditch to be eaten by crows.
How horrible. You're dead now.
Because you're dead, your son — let's call him Ronald Bump Jr. — inherits your giant portfolio. When he sells it, he only has to pay taxes on any gains the investment makes beyond the $9.9 million — regardless that the stock was originally purchased for just $100,000. He can go his merry way a full almost-$10 million richer, convinced of his own singular brilliance, free to hunt endangered mammals and approvingly reply to racists on Twitter with the comfort of a nest egg to make his economic anxiety disappear.
And the meritocracy triumphantly soldiers on.
The bottom line, if you hold stock until you die and pass it on to your kids, spouse, or golden retriever, neither you, nor they ever have to pay taxes on the value it accrued in your lifetime. Pretty sweet!
5. A lot of rich families don't have to pay taxes on the money they pass on to their heirs, even though there's a tax theoretically designed to make that happen.
"We repossess about 379 of these bad boys a day. Mwa-ha-ha-ha!" — the government, probably. Image via iStock.
To hear anti-tax advocates tell it, millions of hardworking Americans are subject to an evil "death tax," whereupon soulless government brownshirts descend en masse to rip the family farm away from Junior not nine seconds after Ma and Pa's untimely death in a freakish tumbleweed accident. It's the sort of thing that gets decent people riled up, demanding answers and installing electric fencing around their property. How could Uncle Sam be so heartless? So cruel? So greedy?
The thing is, most Americans aren't wealthy enough to be subjected to the "death tax" — more properly known as the estate tax. If you leave a small retirement account, family home, or a couple of used toasters and $50 to your kids when you pass away, the IRS won't send you an invoice.
The tax only applies to estates being passed down that are worth over $5.4 million. So unless Ma and Pa's farmhouse looks like this:
You're probably not going to see a tax on it.
Yes, super rich people — your aforementioned Gates, Bloomberg and Zuckerberg dynasties — do have to pay estate taxes, and thank Zod. And, yes, it's good that middle class families don't have to pay it. Meanwhile, lots of pretty rich people (albeit not Gates, Bloomberg, or Zuckerberg rich) are making out great under the current system, even as activists try to do away with the tax altogether, because the net worth limit for when the tax kicks in is so high that those families don't have to pay anything at all either — which allows dynastic wealth to keep on piling up.
As recently as 2004, the estate tax kicked in at $1.5 million. The current limit of $5.4 million is, frankly, a crap-ton of money to be able to pass down tax-free.
Even without such a high estate tax threshold, kids would be able to keep using the heirloom kitchen appliances long after their parents are gone.
Unfortunately, with the limit currently in the stratosphere, it also means that Junior can keep up the Kobe beef farm as he rides his platinum-hulled tractor into the sunset.
Considering all the deductions, loopholes, and advantages already in place, it's sort of weird that Congress' next priority is to reduce the tax burden on the wealthiest Americans even more.
After Republicans wrap up their will-they-or-won't-they dance with the American Health Care Act, Congress plans to tackle "tax reform," so-called because it "reforms" more money into the pockets of rich people. Among the proposed changes to the tax code: lowering the top income tax rate from 39.6% to 33%, lowering the corporate tax rate to 20%, and completely eliminating the estate tax.
Someday son, much of this will be yours, tax free! Photo via iStock.
But as we've seen numerous times these past few months, America doesn't have to let it happen!
Calling your representatives worked to scuttle the first go-around of the AHCA, and it can work to put the kibosh on the current tax reform plan too.
It won't be easy. But after helping kill a suspect federal law, and finishing and filing your taxes, you'll definitely have earned a nice vacation.
May I suggest buying a yacht?"
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