Are you from the US? If so, it doesn’t sound as if you know much about the tax system in your own country.
First, payroll taxes stop at an income of $87,000. Any “wealthy” person will earn more than this, so they do not need any “dodges” to get around payroll taxes - they will have paid their full whack. OK, they still have to pay Medicaid at a whopping 1.45%
Payment in stock counts as income and is taxed as such. The gain on stock options, however, is taxed as a capital gain, now just 15% Such gains would indeed avoid payroll taxes, in the unlikely event that the wealthy person earned less than $87k
Bonuses are income and taxed as such.
Allowances are income and taxed as such.
So the wealthy will probably be paying 40% or more in Federal and State taxes on all these extras. And if they have sizable tax deductions, then the AMT will get them.
And the higher up you are, the more you can take advantage of 401ks, or maybe buy a house to get that mortage and property tax deduction, and so on.
As I said before and I’ll say again, I’m sure I paid more in tax when I made far less money than I make now, because now I make enough to be able to afford to have choices about how much tax to pay and who to pay it to. It helps to be over the Social Security limit for instance: not only does this mean that a lower percentage of your income goes towards this tax than someone who is beneath the limit, but you can also put the extra money per paycheck towards maxing out your 401k, thereby lowering your overall tax rate even more.
And of course I now own a house. I know for a fact that even though I’m making significantly more than I was just a few years ago, I’m paying less both as a percentage and as an absolute amount than I was at that time, because of the combination of mortgage interest and property tax deductions, and maxing out my 401k.
True to an extent, but there is a maximum limit of about $11k per year in 401k contributions, which is a tiny portion of a wealthy person’s income. Plus there are rules to limit the amount that highly-remunerated employees can pay into a 401k based on the amount that all the members contribute. Hence medium-paid employees get a better percentage benefit than highly paid ones.
Yeah, I don’t see why mortgage interest should qualify for any tax deduction. The property tax deduction is just so that you don’t pay tax on taxes, so that seems reasonable. I hardly think anyone is going to be enthusiastic about a large property tax because it decreases their income tax. Tax is tax is tax - they just go to different places.
Such as? You don’t get to imply extra favored treatment if you can’t name it.
Health Care Spending Account - this is a way to shelter money you spend on health care.
Dependent Care Spending Account - ditto for day care.
And generally, the higher income you have, the more likely it is that you work for a large company rather than the local landscape guy, and therefore you’ll have your health insurance at work, and the piece of that insurance you pay for is also tax sheltered.
Considering just the 401k, the above accounts, and the portion of what I pay for insurance, my income is reduced by about 16k. I’m guessing that the employer piece of my health insurance is worth about 7k/year; that’s an amount I don’t have to pay but which significantly increases my prosperity and security. All in all, that’s about 23k that I get tax free that someone working for much lower pay at a small company with no health insurance isn’t getting.
The 16k that my income is reduced by is an adjustment to my income, NOT a deduction, and is therefore worth more for two reasons:
1 - There’s no limit on how much I can take on the 1040. Above a certain income, you have to start taking a piece of your deductions away.
2 - It counts towards that limit in number one, so the more I can take in adjustments rather than deductions, the more of my deductions I can make count.
I also of course get a little bit in deferred stock and stock options, which I don’t have to pay tax on right away, and on which I pay a lower rate if I’m fortunate enough to have a gain in the stock or if the options are in the money and I don’t cash them in right away.
The total tax my wife and I pay on our two incomes now is only a couple of thousand more, if that, than what I used to pay all by myself just a few years ago on a much lower income. All together we’re paying around 7k less now than we used to.
**The Section 125 stuff is available to everyone (as long as their company offers it). People earning less than $87k also get the benefit of not having to pay payroll taxes on their contributions, so this is hardly a shelter for just the better off.
Don’t forget to add property taxes to your tax total. After all, they are still taxes - it is not money that you get to spend.
Nope, because in France income tax isn’t deducted on paychecks. The income tax services sends you the “bill” the following year for the actual amount you owe, and you’ve to write a check (or pay it with a cartload of 1 cent coins, whatever). So, here, everybody would be expected to know how much he pays in income tax. But…nope…some people don’t…
amarone: you just burst my bubble. Actually, property tax amounts to just about 7k, so I guess we’re actually just even, in terms of the absolute amount.
Of course, in terms of the percentage, it’s quite a bit lower, since what that means is that I’m paying the same amount on a higher income, which shows a certain regressivity in the total tax structure. The spending accounts I named are important because, at least in the instance of the Health Care account, there’s a large element of choice in how much you put in (if you have children and you have to pay for day care, the Dependent Care account is pretty much a no-brainer) and of course it’s easier to contribute more if you make more.
But, the point about total tax take is a good one.
:eek: Remind me not to move to New Jersey (or you have a very expensive house).
And if you have a lot of deductions, you’ll need to look out for the AMT. The projections are that a lot of upper-medium income people will be hit in the next few years, particularly if they have a lot of deductions.
I agree that the health and day care accounts help, particularly because the contributions are taken straight off gross salary.
So, I do agree that there are some ways to reduce taxes that it is easier for better off people to use (and I would abolish tax relief on mortgage interest, personally - I don’t see why the government should enforce income redistribution from non-homeowners to homeowners). My main purpose in intervening in the thread was to counteract the common myth being propagated by other posters that “the rich don’t pay taxes.” “The rich” pay taxes, and they pay more than anyone else.
If they’re non-qualified, the gain is ordinary income. For example, you have 20,000 options granted at $10. You exercise at $20. You now have $200,000 of ordinary income subject to income and payroll taxes. It doesn’t matter whether you went straight to cash or kept the gain as stock.
If they’re incentive and you keep the gain as stock and you hold the stock long enough after exercise (1 year after exercise), you pay capital gains rates.
Actually, NJ’s nice. We even have tulip trees up here (which I know is a common tree down there, 'cause my sister lives in Georgia).
However, the housing is expensive, and the taxes are high. Salaries for jobs like mine are correspondingly higher, of course, but it’s still tough to afford things around here.
Question re the AMT (I can never seem to get any decent info on that thing): are they limiting both adjustments & deductions or just deductions? It’s tough to strategize if you don’t know this kind of thing.
Here’s a link on things that can cause AMT to kick in. I mentioned AMT because of your reference to property taxes (and high NJ taxes). Neither of these count as deductions when calculating tax liability under AMT. And here is an article from Fortune.
Interesting. You start, on the AMT form, at line 36 or line 39 of the 1040, which is either your adjusted gross income or your AGI minus deductions. Then they’ve got a bunch of things to add back, none of which are adjustments. So that means even under the AMT there’s no limit on how much you can put into a 401k, Health or Dependent Care Spending Account, or towards paying for your portion of employer provided health insurance, other than what the regularly published limits are. Which means the more adjustments you can take, the less the chance that the AMT will strike you. Which is fine with me.