By Dr. James M. Dahle, WCI Founder
If you want to lower your taxes, it’s important to have more than a vague understanding of how our taxes works, what tax bracket you expect to be in, and which activities are incentivized and disincentivized by the IRS. If you're a high earner looking to reduce your taxes or even if you aren't rich yet, try these tax savings strategies.
7 Tricks to Pay Less in Taxes like the Rich
# 1 – Depreciation
Buildings and equipment go down in value over time. In recognition of this fact, the IRS lets owners of these sorts of business assets take a deduction each year equal to an estimate of how much the asset went down in value that year. That seems reasonable, right? Structured properly, some real estate deals allow for more depreciation than the property even generates in income, basically sheltering all of the income of the property from taxation.
Since rental income isn't earned income, it isn't subject to payroll taxes either. Some newbie real estate investors, upon learning about this tax break, get a little too enthusiastic and feel like they're getting some sort of massive free lunch. They really aren't, because the building really is depreciating. That's why every few years you have to put a new roof on it or a new water heater in it and eventually the thing is bulldozed to make room for something new. But there is a little free lunch there.
The free lunch shows up when the depreciation is recaptured. When the asset is sold, all of that depreciation is recaptured. So if you bought the property for $200K, depreciated $100K of it, and then sold it for $300K, that $100K in depreciation is “recaptured” and taxed. The free lunch is that it is only taxed at a maximum of 25%. If your marginal tax rate was higher than that (28%, 32%, 35%, or 37%) then you come out ahead in that arbitrage. If your marginal tax rate is lower than that, then it is recaptured at your current marginal tax rate.
So for high earners, depreciation recapture does provide a very real tax benefit. Not only do you get to delay paying the taxes (there's a small amount of value there available to anyone) but when you pay them you pay them at a lower rate (a moderate amount of value there). Appreciation is also taxed at long-term capital gains rates, but we'll get into that more in the next section.
Another great aspect of real estate investing, of course, is that you don't HAVE to recapture the depreciation when you sell IF, within 60 days, you invest your proceeds from the sale into another property. In this “1031 Exchange“, the depreciation you took on the prior property is subtracted from the purchase price of the new property and then you can continue depreciating the new property from there. This allows you to delay the payment of the depreciation recapture tax even longer and if the new property is more expensive than the old (remember how you trade houses for hotels in Monopoly) you get to continue to reap the benefits of depreciation. In fact, if you continue to exchange properties every decade or so until you die, then thanks to the step-up in basis at death, that depreciation will NEVER be recaptured.
So, is this tax break only available to the rich? No. Anyone can do it, although it is more beneficial to high earners. There are two real estate investing benefits only available to low earners that kind of make up for it though.
- If you have a Modified Adjusted Gross Income below $100,000 you can deduct up to $25,000 in real estate losses against your ordinary earned income. High earners can't do that unless they're real estate professionals.
- As we'll note in the next section, lower-earning real estate investors may very well be able to stay in the 0% capital gains bracket.
# 2 – Capitalism
Sometimes on social media you run into people who are, frankly, communists. There's a reason communism didn't work, of course. It's not that capitalism is all rainbows and unicorns either. It's the worst economic system out there except for everything else we've tried so far. In capitalism, you put your money (capital) to work for you. Then you get paid for what your labor earns AND for what your capital earns. This is paid to you in interest, dividends, and appreciation of your assets.
Our society, through its elected representatives, has decided to encourage the long-term investment of capital, offering lower tax rates on qualified dividends and long-term capital gains (i.e. invested income) than on earned income. In addition to encouraging investment, this policy also acknowledges the fact that we pay capital gains tax on nominal gains—inflation is often a large chunk of that long-term capital gain and it really isn't fair to have to pay taxes on something that didn't actually increase in value. Interest, ordinary dividends, and short-term capital gains are, of course, taxed at ordinary income tax rates. In addition to the lower tax brackets available to long term investors, you also don't have to pay payroll taxes (Social Security and Medicare) on unearned income.
So, is this tax break available only to the rich? No way. In fact, high earners pay up to 23.8% on long-term capital gains and dividend income. Low earners pay $0. You too can dodge taxes like the 1%!
# 3 – Loans
Another tax-saving tactic occasionally employed by the wealthy is to borrow money instead of earning it or getting it from selling assets. The problem with this tactic is that it usually involves paying interest. If the interest paid is much less than the tax cost, it can make sense. Examples of this tactic include borrowing against cash value life insurance policies, borrowing against real estate, or borrowing against an investment portfolio (i.e. a margin loan).
Borrowed money spends just like any other money, of course, as most of us learned in medical school. However, if you're just delaying the payment of a tax, it probably isn't worth all the interest you'll pay. But if by delaying the tax you can reduce or eliminate the amount paid, then it may be worth it. For example, if you're going to be in a lower tax bracket later, it can make sense to borrow against an asset instead of selling it. If you can delay until the day you die and take advantage of the step-up in basis, then it can really make sense.
Is this tax break available only to the rich? No. Anyone can borrow tax-free at any time. Now the wealthy likely have more assets they can borrow against and are likely to be offered better terms on the loan, but the tactic is available to all.
# 4 – Retirement Accounts
The wealthy often sock money away into tax-protected accounts like Roth IRAs, 401(k)s/profit-sharing plans, defined benefit/cash balance plans, 529s, and health savings accounts. They can even, in effect, move money from a non-qualified/taxable investing account into a tax-protected account through the Roth conversion process (taxable plus tax-deferred = tax-free). Inside these tax-protected accounts, their money grows faster and is often protected from creditors.
As you are probably going to guess, this tax break is also available to low earners. In fact, a certain amount of earned income is required to make retirement account contributions. You can't use them if you don't do any work at all.
Low earners are actually much more likely to be able to put ALL of their retirement savings inside tax-protected accounts (rather than a non-qualified, taxable account) and don't have to hassle with the traditional IRA income deduction limit and the Roth IRA income contribution limit.
# 5 – Own Businesses
Now YOU know how to pay less in taxes too!
Wealthy people are much more likely to own businesses than the poor. Businesses generate wealth. Not only do they produce income, but if managed well, they become more valuable over time. A business is able to deduct all of its legitimate expenses and depreciate its equipment and property. When you own a business you can hire others. Since employees on average are not paid what they are worth, at least in the long-term (or the firm would go bankrupt), the business owner benefits from their labor as well.
Is this tax break available only to the rich? No. Anyone can own a business and deduct all its expenses. If they run the business well, they can benefit from their employees' work too.
# 6 – Take Distributions
Another tax break the rich take advantage of is to split their income into salary and distributions. By forming an LLC or a corporation and making an S election, the business is taxed as an “S Corp”. The portion of the income of the business that is determined to be distribution is not subject to payroll taxes like Social Security and Medicare.
Is this tax break available only to the rich? No. In fact, lower earners using this tactic may be able to save a much higher percentage of their income. A higher earner will only save the 2.9% Medicare tax but a lower earner may save 12.4% in Social Security tax AND 2.9% in Medicare tax.
# 7 – Carried Interest
Carried interest is the share of the profits of an investment paid to its managers. For example, a typical deal might be set up that the investors get an 8% preferred return and then any profits above that are split 80/20 with the managers. That 20% of profits paid to managers has traditionally been taxed at long term capital gains (LTCG) rates, even if it is paid out every year from a hedge, private equity, or real estate fund. The origin of this tax break is actually a fascinating bit of historical trivia—Sea captains were paid 20% of profits after a successful voyage. It was carried into oil and gas exploration ventures in the beginning of the 20th century and around the turn of the century, into the blossoming hedge fund industry.
The carried interest tax break has been the target of a great deal of criticism from both sides of the political aisle for years and so it was no surprise to see the 2018 Tax Cuts and Jobs Act limit it somewhat. In order to qualify for the lower LTCG rate on these profits, the assets must now have been held for at least three years (rather than the usual one year hurdle the typical investor faces). It is likely only a matter of time before this tax break is eliminated completely, although the private equity and hedge fund industries are among the biggest political donors on both sides of the aisle.
Is this tax break available only to the rich? It's worse than that. It's only available to the rich in the financial services industry. Although the door is wide open to you if you would like to start a hedge fund, the reality is that very few people with less than a seven-figure income will ever benefit from this tax break. Being able to use six out of seven of the “tax breaks of the rich” isn't too bad though.
What do you think? Which of the seven tax breaks of the rich have you implemented in your life? What plans do you have to implement some of the others? Comment below!
I’m sorry but your numbers on the 1031 exchange are off. You have to identify the new property in 45 days after the prior sale (and notify the intermediator who is holding the $ from the sale) and then close on the new purchase within 180 days of the prior closing. I just went through this last year on several sales. 2 failed to close so had to pay capital gains and 1 was successful so the tax was deferred.
The biggest effect on my taxes comes from being married and having 4 dependent children.
Tax advantaged accounts help a lot as well
I do not have enough in a taxable account to benefit much from LTCG yet.
I do not plan to invest in Real Estate, start a business or hedge fund so I will not likely be taking advantage of the other methods. But they are available to me which is the point you are making.
Great post!
Keep up the good work!
#PayingMyFairShare
It is the wealthy who pay the vast majority of the taxes. I was unhappy to learn, as my income went up, that not only did the tax rate go up, but a lot of the deductions went away as well. Double whammy.
The tax man takes a big bite.
Dr. Cory S. Fawcett
Prescription for Financial Success
+1 to this.
The top 1% pays 40% of all income taxes and the top 50% of wage earners pay a whopping 97% of all income taxes.
This is my favorite short video that gives a great perspective on our tax system, in one of the most relatable ways (The tax code explained in beer):
https://youtu.be/BomQxCG5VG4
The recent tax package was the first real tax break I have received in my professional working life…since 1994.
They raised the limits on the AMT and this used to hit me (and many professionals) to the tune of $6000-$8000 a year. They gave me back something for my children (a credit worth $4500) after prior years were limited by the Pease deduction killing law. Finally, my kids give me a deduction again…
Then, the pass through business deduction on my second job allowed a 20% deduction on some of that income.
The total federal tax savings for my family of six was about $17,000. It was too little, too late for me as I had already begun to limit my moonlighting as my marginal dollars were so highly taxed they were not worth earning.
The top 20% of wage earners paid almost 90% of the total federal taxes in 2016. The tax code is so progressive that I can’t wait to make LESS money (read retire).
Progressive Liberal weighing in.
1- us wealthy enjoy more of, and most of, the benefits our taxes pay for. Food stamps? Chicken feed. Owning a million dollar business and not having to give Putin a sizable share of the proceeds (or risk assassination or imprisonment) is Master card level priceless. Functional roads and fairly honest police are benefits of being middle to upper class Americans not available in many parts of the world, and partly responsible for the high return we get on our investments.
2- as wage earning doctors at some time in our life if not our entire careers and denied the S Corp option unless we can show our medical business is more than a doctor caring for patients, and paying the extra 12.9% (at least capped at some amount we usually eventually exceed) plus regular not LTCG rates on the proceeds of our sweat and sometimes blood and tears, we suffer the extra tax burden of the working class as compared to the capital providers.
However my biggest gripe about the unfairness of our tax system is how socialist it is for the groups organized and wealthy enough to have Congress rewrite tax code in their favor. (And the AMA is nothing compared to oil, pharma, or Wall Street.) Tightening up campaign finance laws might do more to give us fairer? ; or at least more democratically chosen; tax laws.
Fight the power, my sisters and brothers.
I think a lot of the issue is related to working with percentages. A 5% tax reduction is far more valuable to someone with $200,00 of taxable income, less valuable but still notable to someone with $100,000, and close to negligible for someone with $40,000 per year or less. You can’t tax optimize your way to wealth at lower income levels.
While anyone can use almost all the tax strategies outlined above, their value depends on taxable income. Getting a high income is the hard part.
I wish docs would realize they’ve already done the hard part!
“Sometimes on social media, you run into people who are, frankly, communists.”
This made me giggle like an idiot in my office. Thanks for that, Jim.
There’s a lot of hate in the media at a select few who use legal aspects of the tax code to decrease their effective tax rate. Case in point: our president. It’s funny, but real estate is one of the few industries where it’s a goal to have a “loss” on your business come tax time. The media (in general) doesn’t get that this is actually a good thing for real estate investors.
— TDD
What makes you think the president uses legal strategies to decrease his effective tax rate? I mean maybe he does, but he sure fights hard to keep his returns secret so we’ll likely never know.
Do you publish your returns? 😉
Well, now that you mention it, no. But I’m also not someone that voluntarily chose to vie for the great honor of leading our country.
I know that they’ve all done it in the past, but I’m not sure it should be a requirement. Maybe we’d get better people to lead if they were allowed more privacy.
Is that an honest suggestion or a devils advocate moment? Do you truly believe that reducing what we know about money in politics is the way to improve our representation? Regardless of political party affiliation, it seems hard to believe that passes the whiff test.
Would you run for office in today’s climate? What would need to change in order for you to do so? One thing that would need to change for me to do so would be for people to treat politicians more nicely and give them a little more privacy.
I absolutely agree that a more civil environment where disagreements are explored rather than sticking to party lines or attacking the individual would be a benefit for all of us. I disagree, however, that covering up the flow of money in politics is good for us – Left, Center or Right.
Stepping away from politics, your openness about your own finances has been incredible and has given me more confidence in your recommendations over the years. I have learned an awful lot from you and truly appreciate all the work you’ve put into this. When I pay off my student loans within 26 months of residency, it will be in large part thanks to you. When I finish setting up a revocable trust for my family’s future it will be thanks to your writing. When we bought a house and car well within our means, I thought of the WCI’s philosophy of living like a resident. When I review my life and disability insurance policies and then put them away for another year, I silently thank you.
Regardless of disagreements on financial disclosures, I really respect you and have learned a ton here. Thank you
We’re not talking about “the flow of money in politics.” We’re talking about a politician’s personal finances.
I voluntarily chose to disclose my own finances. That’s very different from being forced or shamed into doing so.
If politicians were given more respect perhaps we’d have better politicians.
RICHARD NIXON: I welcome this kind of examination because people have got to know whether or not their president’s a crook. Well, I’m not a crook. I’ve earned everything I’ve got.
Niceness doesn’t stop them from running roughshod over you with their policies. That started with excluding residents from collective bargaining protections.
When the penalty for cheating on your taxes is minuscule (see Paul Manafort), i consider that’s tantamount to a sanction, so yeah, his effective tax rate was MUCH lower.
That’s why we wanna see the returns. You dodged the fairness issue entirely to hide behind the verbiage of the tax code when the whole argument against the 1%s taxes is that there’s enough of them cheating we’re starting to assume they’re ALL cheating.
This is also, tangentially, why the arg that the corporate tax rate in America is too high compared to other countries is bogus: the cost of corruption is high elsewhere and low corporate taxes are offset by high under the table costs. If it was really apples to apples there would be no corporate business in America.
Do you cheat on your taxes? I don’t. So why do you think the rest of the 1%ers do?
As near as I can tell, cheating is at least as prevalent among lower earners as among higher earners. Ever worked for tips and observed how little in tips your coworkers claimed as income?
At any rate, just because you want something doesn’t mean you are entitled to it.
Longtime reader and fan, but I don’t think this is your best. Your engagement on social media comes across as somewhat tone deaf. Easy solution: stop auguring with people on Twitter 🙂
This would have been a fine post if you had not opened a can of worms and simply began with “7 Tricks to Pay Less…” You literally began talking about a highly controversial topic, and stopped abruptly by saying “I’ll leave that up to the political process.” Striking that first part would leave more room to engage readers on decreasing tax liability. Then again, that just might be my past as an editor talking…
Also, calling other people “communists” is quite comical, especially when many on the so-called “other side” might be in favor of regulation of our existing (quasi) capitalist system. Just ask your readers about rising hospital CEO/admin compensation, and I’m sure you’ll have a group sounding more like Bernie!
Not everyone who disagrees with you deserves to be painted with a broad brushstroke. You really think an Elizabeth Warren voter is a tankie? Is someone a Stalinist if he criticizes the billions in coal subsidies our government spends yearly? Am I a Maoist if I think my state government should give tax credits for a company increasing workers’ wages, or better yet, providing some pathway to employee ownership? If someone thinks that’s the case re: all those boogeyman terms, I would suggest broadening his or her ideological understanding of history and political movements. Either that, or turn off Fox News every once in a while and have a conversation with someone who isn’t in the libertarian bubble.
I don’t expect every reader to like every post I write.
When I was talking about communists I wasn’t talking about calling liberals or even socialists communists. I’m talking about true-blue, died-in-the-wool communists. I had no idea there were any, much the number that there are!
Thanks for clarifying! I always remind myself that especially with social media, extremism tends to overrepresentation. If you ask me, I truly doubt there are many true communists out there. They might just be the loudest voice in the room! Either that, or they’ve perfected the art of trolling, knowing they will likely get a response.
I agree it’s still a tiny percentage, but I was surprised it existed at all!
Wouldn’t that be true-Red?
Speaking of capitalism vs communism…I’m not sure if you all realize that the existence of WCI’s capitalism thrives on clicks to his page. Including a wacky title and controversial statements like the Twitter feed examples and communism statement should garner him some extra clicks. That in turn generates extra bargaining power when negotiating with advertisers not to mention numerous other benefits to his book, courses etc. Heck, the more we comment, the more benefit he sees. Since I support WCI as a whole, that is actually one of the reasons I tend to leave comments.
I do agree that more of his posts have become more controversial and “charged”. I also agree that this is a pretty big change from the past, but I suspect this is on purpose. Maybe I am wrong.
Thanks,
Ha ha, funny you’d say that. I’ve been accused of being “less charged” lately than the blog was in the beginning.
Maybe it is just a natural ebb and flow 😉
This is exactly why tax simplification should be a priority. 99% of people don’t understand taxes and will parrot whatever they hear. I’ve heard even top economists make factual errors about the tax code.
tax rates are super low, 18% effective rate on 300k in florida
I do not want my tax rate to be any higher, I rather have it lower and increase the taxes on qualified dividends and long-term capital gains. Match both the earned income/ marginal tax rate and taxes on qualified dividends and long-term capital gains. But it has to come with decrease of marginal tax rate.
I do get frustrated that I save lives literally everyday and work all night long and still I get paid lot less than CEO of my hospital, and not even a fraction of the CEO of some of these health care industry. In fact these CEOs are paid in millions even if there company did poorly. On the other hand if my practice does poorly, I hardly get paid.
How would you like a job managing hundreds of people? I know I wouldn’t. I’d have to be paid a whole lot to do that work. If you find that work attractive, why not get an MBA and start your way up the hospital admin tract? The competition isn’t all that impressive as you know.
Well, the competition for CEO of a large hospital system is pretty fierce. The standard route is to start as a physician and move early and strongly into management. Stay there and work your way up the ladder, for years. Let your clinical skills atrophy to the point that you can no longer practice. If you got on the track early enough to be in the running for leading big hospital systems, you may never have practiced enough to be particularly good at it. Some people who come through the dean route had to be accomplished academics, which may or may not have included being good clinicians.
Once you get such a job, your security is gone. Unlike a good clinical doc, your future is often at the mercy of things beyond your control. Do a good job clinically and people will want you to practice medicine. Do a good job but your system gets in trouble, or you lose a political fight for the attentions of a major donor and you are out. No appeal to a medical board. Employment at will.
If a clinical doc is forced out of a hospital for reasons other than their quality of care, they can get other work. If you are dumped as CEO you have precious little chance of ever getting such a job again.
Our former CEO was a wunderkind, for a while. Then OK. Then a loser who got fired. That was years ago and he is still unemployed. Kicked around a variety of self employed gigs. Tried consulting but no one would hire him.
High reward but higher risk. Since no one needs the difference between a good income for a physician and the huge income of a big CEO, why embark on that exercise?
I could see the appeal for a pediatrician or family practitioner with a lot of debt. For the rest, does not seem the increased income justifies the risk.
Completely agree. 100% admin is extremely risky and unnecessary for a good clinician. As Jim says, we’ve already won the lottery, just don’t be dumb with money.
I do half clinical and half admin but the big bucks require full commitment and full risk. It’s big risk too. For perspective, I’d make more with full time medicine and I do ID (not your most lucrative specialty). Did full-time private practice for years.
I enjoy the diversity and the chance to influence process for the good of the medical community. Helps prevent burnout and boredom. It truly is a different way of managing people and problems.
This is a good topic for a future blog post. I’ll make a note of it.
There’s a lot of “grass is greener” with administration, I think. I’ve started taking on more administrative responsibilities in my practice, and I’d say that it’s a mixed bag. Some of it is rewarding and a welcome respite from the monotony of clinic, but some part of my administrative duties are just stressful and annoying.
Thanks for the great discussion here!
— TDD
In the words of the immortal Beatles:
Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman
Should five per cent appear too small
Be thankful I don’t take it all
‘Cause I’m the taxman, yeah I’m the taxman
While it is true the top earners pay the overwhelming percentage of the taxes, some of this seems a bit tone deaf.
How is a non rich person supposed to take advantage of the tips on Loans and Real Estate? Many of our low income brethren were hindered from buying real estate in appreciating neighborhoods and so deprived of the generational wealth that others enjoyed. To buy property you have to come up with a down payment. To get a loan you have to demonstrate loan worthiness. Those two things can be hard to come by.
I’m not saying it’s impossible. I have never had to do it starting from nothing. Maybe I would join forces with friends or family and live under one roof to lessen the paycheck to paycheck drain that prevents low income folk from accumulating enough to participate in these deals. But to just say because there is no LEGAL barrier to a low income person using a tax dodge is far from the whole story.
Maybe you’ve never done it “starting from nothing” but many of your peers, including me, have. No, it’s not easy. Yes, it requires a lot of sacrifice. But come on….pretending that someone with reasonable intelligence willing to work hard can never buy a rental property in their entire life? Give me a break. There are millions of small-time landlords out there that are living proof that isn’t the case.
“Gimme a break?” I suspect you have had many breaks, as have I and most physicians and readers of this blog. We are not the people I am talking about. We were (mostly?) born to mentally stable parents in safe countries and safe neighborhoods with reasonably good schools. (Some of us even got FREE FEDERAL TAX DOLLARS because we grew up in Alaska.) The idea that everyone just has to pull themselves up with hard work completely ignores numerous aspects of luck that figure in why we end up where we do. (https://blogs.scientificamerican.com/beautiful-minds/the-role-of-luck-in-life-success-is-far-greater-than-we-realized/)
I have a very limited exposure working with the poor, but even with my limited exposure it is clear to me that neither you nor I nor most of the commenters on these boards have much of an understanding of what the challenges are for someone raised in terrible situations even just in this country, in a lousy neighborhood because their parents could never get a loan to move to a better neighborhood because they had the wrong skin color.
Life is not like Monopoly where everyone starts with same amount of money and you just buy property and collect $ as you pass Go each time. If you want to taste of life for the poor in this country, then try playing Monopoly where you start off with less than nothing while your fellow players have plenty.
I wish there was a “like” button for this. I think high earners do struggle an odd mix of entitlement and even occasional resentment. We want sympathy/praise for hard work, and do not feel like we receive it all the time from the surrounding culture. Do not get me wrong, it is truly impressive to actually become a high earner like a physician. But rarely do people in our community stay 100% humble and recognize the invaluable help we have received along the way. Perhaps it is the “God complex” or “Short Man syndrome” at its finest.
Two brief “case in points” for this:
1. Every time someone speaks of student loan forgiveness in these parts of the internet, there is always someone who has paid off all loans who sarcastically states, “I expect to receive my check for $xxx from the government.” Be happy the process made you a better person and built your character. No need to throw a pity party and nurse resentment to others in financial hardship!
2. When discussing taxation, high earning professionals tend to subconsciously lump themselves in with billionaires. They take a proposed “fair share” tax on Amazon or Bezos as a personal affront. We sure do crave pity from others, so much so we are willing to equate our 7-8 figures of net worth with more money any of us could ever imagine.
I have worked extensively with the poor during my career. If you (or a parent growing up) had never experienced homelessness, medicaid, imprisonment, eviction, job-caused disability with a boss who could care less, explicit racial discrimination, chronic hunger/food insecurity, lead paint in your rented apartment, unstable employment with no benefits, and/or the difficult choice between groceries or the heating bill… then count yourself as EXTREMELY blessed. There’s no need to feel ashamed about one’s privilege. Just never use it as a weapon to puff yourself up and look down on others.
Our world could use a bit more compassion and understanding from members of our community. We have enough judgmental attitudes and “chip on my shoulder” nihilism already.
I read “give me a break” and think that it is no wonder our culture blames (and even resents) the poorest brothers and sisters of our society so much. It absolutely breaks my heart. We ought to be constructive instead of condemning.
Pete, while I don’t agree with everything you said, I strongly agree with how professionals earning mid six figures and having a net worth of mid seven figures are very different from Warren Buffett and Jeff Bezos. The problem with the wealth tax is that it would require a constitutional amendment, which is very unlikely to happen, but I don’t think it’s a bad idea. But consider the wealth tax: on CNBC, I heard a tax planner coming up with schemes on how to get around it. For instance, do you own paintings worth $200 million? Put the paintings in some form of trust for the benefit of your grandchildren and by some magic that was way over my head, you don’t pay the wealth tax because you have seven grandchildren
And don’t get me started on that huge hypocrite, Warren Buffett, who has been appointed as Saint Wareen by many by his criticizing the tax code where he pays a lower percentage than his secretary. And then he gives billions of dollars away to a charity to escape taxes. All well and good Warren, but why don’t you support the government of the country that made you the multi billionaire ? Voluntary donations to the united states treasury may not be tax-deductible, but they would sure stop my criticism of you
Thanks for the lecture. Apparently unlike you, I have lots of experience working with the poor. I also know many who started out that way but did not end up that way. You may not be able to control where you start, but you can control the direction you move in. Control what you can and use the rest to motivate you to do your best.
Also not sure what “free federal tax dollars” you’re referring to. The Alaska PFD comes from the Permanent Fund, it’s Alaska money built from state taxes on oil companies and the earnings on that money. And there’s no such thing as “free” tax dollars anyway. Those come from someone else paying them.
Pete090 gets it. Obviously some still don’t. It doesn’t matter if you know poor people who made it. Or how many you know. Your life experience is a tiny sliver of the world. Thinking that because you made it, or somebody else did that somehow proves anyone can is narrow-minded and ignores the experiences of many you have nver known and will never know. Where you are is so dependent on where you came from. It is not all about what YOU did and or can do.
So forget about giving a break…how about some gratitude for your own good fortune, some humility about it… oh and maybe some and compassion and empathy for those less fortunate. That seems to be sorely lacking.
[And— by “FREE” tax dollars what I mean is that some of the people WHO got that money GOT IT for FREE, for doing absolutely nothing. (And being moved to a place by your parents and living with your parents doesn’t count as doing anything or earning anything in my book. I don’t begrudge anyone taking advantage of this perk- just reminding some people that they got handouts and help others never did. ]
I suggest you skip tomorrow’s blog post. You’re not going to like it.
Income is not a barrier to buying investment real estate. You can buy with no money down. You can get loans with bad credit. I learned from my grandparents who made very little (he worked in a mill and she stayed home) yet owned about 10 rental houses and retired on the invome. I’ve seen minimum wage earners buy rental property. I wrote about this extensively in my upcoming real estate book. Many real estate investors started with almost nothing. Real estate investing is not just for the rich.
Dr. Cory S. Fawcett
Prescription for Financial Success
3% FHA, 0% doctor loan, an 0% VA loans all appear to require relatively low cash outlays upon purchase. I’m sure there are a variety of SBA and hubzone loans that are pretty favorable too.
The problem with putting so little down is that the property usually doesn’t cash flow unless you got a really, really good deal on the price (or were able to inexpensively increase rent) such that the LTV is really 70-80% just as if you put down a big down payment.
I believe that the vast majority of physicians, including those with large education loans, could manage to buy an income property. It is another question whether they should. Buying with the biggest loan you can get limits your upfront costs but makes it critical that the rental be a success. Unless you already are a knowledgeable real estate investor and prepared to manage the property, this can be an expensive way to find out that you don’t know much.
Yes, it can pay off. But being an owner of one piece of property in one location adds a lot of unsystematic risk. The rewards to such risk should be substantial.
One can hire someone else to manage the property, at the expense of losing some of the return. Or join a pool that lets you invest in a number of properties and get some diversification. Of course, you have to pay to be in the pool…
Outrage from the poor / left shouting “the rich don’t pay their share” is just as frustrating as the rich / right saying “but my taxes are way too high at X%”. Neither sentiment is helpful in furthering discussion on what is the ‘best’ way to fund public resources and services. Everyone has their own definition of what a #fairshare is, so that language is just as useless if the goal is to come up with good tax policy.
Any competent household pays what the tax code says they should using (in most cases) legal techniques. Does that mean the rich are dodging taxes? No. This claim is inherently divisive and counterproductive. No one wants to pay more in taxes than they owe, even the liberal uber rich advocating for the wealth tax. Rich people claim that poor households can pay more into the system- See? They all have iPhones, so surely they can afford to pay something? No one should pay $0 if they’re buying iPhones! Equally divisive and counterproductive. Good tax policy doesn’t start with a prohibition on households earning under $40k from buying iPhones.
(The above are general brushstrokes and I’m not trying to lump everyone with those characteristics in these boxes. I’m sure we’ve all heard these arguments, probably on this site.)
Culture has taken such a toxic nature these days. People can hardly have reasonable discussions about politically charged topics because they’re already slinging poop at each other at the onset.
I agree our politics are far too polarized these days. I fault the primary process, social media/shorter news cycle, and lack of statesmanship among politicians.
“… they’re already slinging poop at each other at the onset.”
This made me laugh. It evokes the image of monkeys, which is pretty accurate here.
Thanks for that!
— TDD
Take away all deductions and institute a flat tax on all income at the same level for everyone. It already exists for capital gains. How can anyone argue that its unfair if everyone pays the same rate?
Interesting polls today on the msn.com website. When asked if people thought that taxes should be raised on billionaires a large majority voted “yes!”. The next several questions asked if people would be personally willing to pay more taxes to provide universal healthcare, more social services, pay off kids school loans etc., and the large majority voted “no!” for each one. So, you see, what people really want is for someone else to pay more in taxes for what they want, but not for them to pay more. Maybe people would be less inclined to vote for more spending on stupidity when its actually going to come out of their pocket.
# 1 It doesn’t exist for capital gains right now. Some pay 0%, others 23.8%.
# 2 There’s are two good reasons LTCGs are taxed at a lower rate- first to encourage long term investments and second to account for the fact that a good chunk of most “gains” is just inflation.
Not so clear that a wealth tax would require a constitutional amendment. Apparently scholars of tax law and the constitution think they have a good argument that it would be OK.
On the other hand, absent a constitutional amendment limiting the rate and the level of wealth to which it applied, I can see no reason to assume that something that begins as a tax on wealth greater than $100 million would not evolve into a tax that applied to a large share of the population. Look at what happened with income taxes.
I do not accept the equation of “concern for the poor” with “support for higher federal taxes”. Warren Buffett talks about the importance of raising taxes but he makes his donations to charities, not to the government. If he thought that the government would put the money to better use, presumably he would give to the Treasury instead.
I completely agree that it is almost impossible to become a physician coming from many disadvantaged backgrounds. The challenges kids face make getting a decent education just about impossible. As for being able to go to college and being prepared to do well in a premed curriculum- out of sight for crack babies.
But that does not lead to a knee jerk assumption that some higher level of federal revenue would solve those problems. I would love to see evidence in favor of that claim, but none seems to be forthcoming.
“Free tax money” Great! Where do I sign up?
The Fed can create federal revenue by buying Treasuries in unlimited quantities, but that is not TAX money. You could argue it is not “free” since the government at least promises to pay the Fed back, someday.
re “carried interest”- since borrowing is tax-free, I am sure this avenue is the way any hedge fund manager would be receiving their annual distribution via an interest only loan, with pay back at the end of the 3yr period, followed by the distribution at the LTCG’s rate.
Interesting strategy, hadn’t heard of that one.
I do 4,5,6 hoping for #7 this year or next… Clinical Telemedicine pays the bills and digital health entrepreneurship enables business ownership deductions . Thanks for your work!
All you need to know is who wrote the tax code. The haves or the have nots? lol
And the argument that paying your legal obligation is fair enough is inadequate when you helped write the tax code so your legal obigation is much lower than it used to be- not actually likely for readers here though.
The wealthy decry their low tax rates, and support liberal politicians, because it softens their public image.
They don’t donate any money to the government, not because they think the government would spend it poorly, but because charity buys them more good will per dollar spent.
Rich people always worry about pitchforks at the door. It’s a very deep fear. They want to appear to be on the side of the lower classes, loudly accusing everyone else of being a racist misogynistic homophobic ignorant deplorable.
It’s a good strategy. But I don’t take it seriously.
Cynical much? 🙂
I am a huge proponent of lowering the AGI to save on taxes. If played right, you keep more of your money while letting compound interest work it’s magic!
Why would I want to keep giving Uncle Sam more of my money instead of investing it. I have been trying to continually increase my contributions into the 401k, HSA’s, and FSA’s to keep my money. Money people do not understand that this will lower your taxes too.
I find the people who do not learn how to make the system work for you are the one’s screaming for socialism. Please, pick up a book and learn. This will save us all in the long run.
P.S. Back door Roth conversions are my second favorite…
Great read, and I learned something new on the LLC.
Thanks for this article. I would love to see your take on how the “upper middle class” in a HCOL area can minimize taxes on very irregular income. My total family comp ranges from $250k to $800k per year (usually closer to $250k.)
It seems tax savings are designed for people who either consistently earn a low amount or a high amount. I have two children but no tax breaks there. My mortgage is $84,000 a year but no real tax breaks there other than the 750k mortgage deduction over time. My husband does own a freelance business part time and we max out his solo 401k but other than that he has no deductions (he is self employed.) I earn the bulk of the income. I am not looking to cheat on taxes but hearing our president pays $750 a year in taxes I am wondering if I am doing something wrong. It sounds like owning rental property wouldn’t be that great given the 25% tax on depreciation at sale. Right now I am over invested in taxable stocks and living in CA my cap gains rate is quite high (about 32%) so there is little savings over income tax. I am now doing a mega Roth IRA each year but that does not help reduce my taxable income. I also try to max out 529 but that is same issue as with Roth. It seems like tax policy benefits the consistently very wealthy and lower middle class but those of us in the middle esp in HCOL areas have to pay the bulk of taxes.
Neither political party cares about us. If I made 800k every year I would be fine paying my fair share but when it’s a 250k year it’s super tight. I wish I could split out my earnings over a multi year period at least.
This seems more like a budgeting problem than a tax problem. By your comment it sounds like you guys are budgeting based on the high end, rather than the low end of a variable income.
You should be paying dramatically less in tax on $250K in income than $800K in income.
The reason the president paid nothing in taxes is because he lost a ton of money and has been carrying those losses forward. Not an approach I’d recommend. A bit like tax loss harvesting that way, just on a massive scale.
What if my legal address is somewhere else in the state, I rent a local apartment for half the month just for the job on a W2, and the other half month I’m not working, I’m back at my legal address out of town. Is the apartment, utilities, commute, & depreciation tax-deductible?
I think the rule is it has to be 100 miles from your home to be able to deduct it as travel costs.