ELI5: Why can’t a middle class individual use the same tax avoidance methods as the ultra rich to pay little to no income taxes?

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Different type of wealth building. Take somebody like Jeff Bezos… most of his wealth is Amazon stock. It’s value climbs to $100B but he only pays taxes on gains when he sells. So even as his stock has gained 10’s of billions in value over the past year, he isn’t taxed on that. Let’s say he sells $10m worth of shares to cover living expenses, he pays capital gains taxes on that, which are lower than income taxes at top income bracket — only 20% for incomes over $441k. So in this example, assuming Bezos’ shares had 0 cost basis, his $10m sale would trigger a $2m tax bill. Not nothing, but basically a rounding error vs. his wealth. The other way that some wealthy reduce taxable income is through a business. By deducting expenses “for the business” they can cut their taxable income and buy things with pre-tax dollars. Say you’re a dentist who wants to vacation in Hawaii… find a Dental Conference going on there, attend and tack on a vacation after the conference — deduct some of the hotel, meals, all the airfare, etc. to cut your true cost of vacationing in Hawaii. Maybe he leases his Mercedes through his dental practice, too, reducing his income and paying for the car with pre-taxed dollars. And that MacBook Pro he sometimes uses to update patient notes from home? Same thing…

blipsman

You gotta spend money to save money on taxes. The problem is the rules are not proportional — they are based on sums, not percentages of income. So Jeff Bezos can spend 0.001% of his income and qualify. The middle class need to spend 10000% of their income.

Christmascrae

You totally can. First you hire a $70,000 cpa, then you tell the cpa to restructure all of your income to maximize tax savings, forming corporations and associated structure and setting up accounts and turn filling all the paperwork with IRS and states. What was the second step?

krystar78

They could, but don’t typically have the resources to do so. Rich people might avoid paying taxes because they have no income, but rather because the value of their company grows. A middle class person could have a company, and could also not take a salary, but that is not very common. A rich company could save a lot of money on taxes by deducting things as business expenses. A regular person can do that as well, but their expense would be a lot smaller on average.

deep_sea2

They can, owning an asset and slowly borrowing against it is tax free for everyone. However ultra rich usually are making it work by borrowing and spending a tiny fraction of their wealth. Spending the same fraction of a $250,000 home might be $600/year which doesn’t really support a lifestyle of the rich and famous (or really even lifestyle of someone who gets 2,000 calories every day from beans and rice and has a well used library card).

bulksalty