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How Thousands of Wealthy People Pay No Taxes (It's Totally Legal)

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1% doesn't pay taxes?With the rise of the Occupy Wall Street movement and its focus on the 1%, the wealthiest people in the U.S. have gotten a lot of attention lately. Yet despite arguments back and forth about whether the rich pay their fair share, one thing is certain: Some high-income earners pay no taxes at all.

A recent IRS study found that one in every 189 taxpayers earning $200,000 or more in adjusted gross income paid no income tax in 2009, the most recent year for which complete data is available. That's more than 10,000 wealthy households paying no taxes anywhere in the world, and more than 35,000 paying no U.S. income tax.

How Did They Swing That?

There are several popular methods high-income taxpayers employ to cut their taxes. The most widely used is to invest in tax-exempt municipal bonds, which pay interest that you don't have to include as taxable income on your tax return.

But itemized deductions also play a key role in reducing tax liability for the rich. Although medical and dental expenses aren't deductible until you spend at least 7.5% of your income on them, some rich taxpayers can use expenses they'd have to pay anyway to offset all of their income. Similarly, deductions for state income and property taxes, as well as charitable contributions, also help rich taxpayers reduce their tax burden.

Idle Threats

The fact that the rich can pay little or no tax under current law has led to proposals to change those laws.

Between the so-called "Buffett Rule," which would impose minimum tax rates on high-income taxpayers, and calls to limit the tax benefits from certain popular deductions, the rich soon may no longer be able to escape paying tax entirely.

But in an election year, it's hard to envision such measures getting through Congress to become law -- and unless they at some point do, the rich will still have perfectly legal ways to protect their income from the IRS.

For more on your taxes: You can follow Motley Fool contributor Dan Caplinger on Twitter here.

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Here's the real problem: everyone has access to all these benefits rich people use to "avoid" paying taxes, but you refuse to invest or start a business, like the rich, and take advantage of these tax breaks.

Instead, you're happy working a 9-5 or living off the govt. and not doing anything to better yourself or your family, such as invest or open a business. While that is perfectly fine, the problem lies therein when you try to blame people who want to succeed in life because you chose your path of being satisfied with your current situation. People like you are destroying the American dream because you believe you're just as important to society as the people who want to succeed in life. You're not just waging class warfare on the rich, you're waging it on the average Joe who wants to live the American dream.

People like Democrats and Liberals want to keep Americans on food stamps, welfare checks, etc. and make sure you are comfortable where you're at so become complacent and don't improve your financial situation. They want you to blame the rich for all your problems and provide for you necessities that you could normally buy if you have a good income so you will be grateful to them and return your gratitude by electing them into office. You see how that works?

Why go after the lower-income people? Because there will always be more lower-income people in life than middle-class or rich. It is directly correlated to the scale of people who are satisfied with living off the government, or working a 9-5, to the people who want to work hard and succeed so they can live the American dream.

This class-warfare will make it difficult to become rich for Americans who truly want to succeed. Even if that person is not you, it is detrimental to society because many of the great achievements we've made came from people who wanted to succeed in life.

January 12 2013 at 2:36 AM Report abuse rate up rate down Reply
electricjet

Many of the deductions mentioned can be used by all income levels including state income taxes and property taxes. Many of the people referred to in the article appear to be retired and are living on social security and income generated by investments. They still pay taxes but in some cases they pay little or no federal income taxes just property, state and local taxes.

I despise this talk of wealth redistribution! If you work hard to better yourself just to have someone take it away then what is the incentive? If you do nothing and someone gives you a handout then what is the incentive to better yourself? This is my issue with the current systems! There is no method to better yourself, or your community! Just handouts that last until they are gone! You are no better for having received them!

November 02 2012 at 4:37 PM Report abuse rate up rate down Reply
jbluhm1951

Many rich people would rather give their money to charity than to give their money to the government to waste. Nothing in the article about that. Also, if the liberals cared so much about the poor they would give more of their money to charity that helps the poor, rather than pushing for higer taxes on those who actually give to charity. Compare how much is given to charity by Conservatives compared to Liberals and then you will see who really cares the most about the poor.

August 01 2012 at 2:55 PM Report abuse +2 rate up rate down Reply
dccpa1040

LET'S NOT FORGET THAT MUNICIPAL BONDS PAY LOWER INTEREST RATES IN EXCHANGE FOR EXEMPTION FROM FEDERAL INCOME TAXES. THESE LOWER INTEREST RATES SAVE ALL TAXPAYERS TRILLIONS OF DOLLARS IN STATE AND LOCAL TAXES THAT WOULD BE USED TO PAY HIGHER RATES OF INTEREST ON THESE BONDS. THOSE BONDS ARE USED TO REPAIR ROADS, BUILD PARKS, FUND BRIDGES, BUILD SUBSIDIZED HOUSING ETC ETC ETC. BE CAREFUL WHAT YOU ASK FOR.

June 08 2012 at 4:51 PM Report abuse rate up rate down Reply
Judith

Great article! It very clearly points out why the top 1% of our population actually pay less than the bottom 99% - because they can afford to take advantage of all the deductions and loopholes. If you're living paycheck-to-paycheck, don't own a home or are struggling to pay a mortgage, for instance, there is no way you can contribute enough to charity for it to count and there is absolutely no hope of investing in, say, municipal bonds. Time for a flat tax - make $2 million a year or $20,000 a year, you get a set amount of credit for each dependent and pay a percentage of the remainder of your total income. What that percentage should be I have no idea, but it should be the same for everyone.

June 07 2012 at 11:43 AM Report abuse +2 rate up rate down Reply
Gerald1961

Its easy for the rich, they own their politicians and the US congress..... oh and Wisconsin.

June 07 2012 at 10:07 AM Report abuse +2 rate up rate down Reply
macerov

I invest in muni bonds for the tax break but the municipalities save on interest rates so its a win win for everyone. Take the tax break away and I'm 100% corporate bonds. Whose going to invest in Detroit water or schools without the incentive.

June 07 2012 at 10:01 AM Report abuse rate up rate down Reply
Don

Time for a tax overhaul,flat tax for all.

June 07 2012 at 9:52 AM Report abuse +2 rate up rate down Reply
GARYMUSIC

The Bush era tax cuts for people of ALL incomes are due to expire at year's end, including the rich.

Obama is trying to play Robin Hood by constantly ragging on the upper income folks! Come on people use your heads and stop being sheeple! It's classic "class warfare" being perpetrated by this clown to garner a vote.

By the way...........................I only make around 45k.

June 07 2012 at 9:40 AM Report abuse rate up rate down Reply
1 reply to GARYMUSIC's comment
Gerald1961

And you speak of people being sheep, here you are spouting the GOPT chant to cut THEIR taxes while you, at 45k, pay way more in taxes then they do. While they enjoy all that you pay for, they pay nothing? Is that equal. Foolish sheep.

June 07 2012 at 10:12 AM Report abuse +1 rate up rate down Reply
1 reply to Gerald1961's comment
Nick

I'd be willing to bet that garymusic is for a flat tax... .

August 06 2012 at 5:17 PM Report abuse rate up rate down
bchrist751

Each and ever American Income Tax payer that Itemize has these Tax deduction. The Author is full of crap! If you have a Mortgage you can deduction the interest paid, if you pay State income taxes you can deduction those also, if you live in a State that has no State income Tax their is a special tax deduction for you... All Charitable donation are tax deductible.! If you own a Small business you have business deduction!!! What a Crock....this Author is lying The Wealthy have no More Tax deductions than anyone else! Here the truth. You may not be able to utilize a deduction but that doesn't mean you don't have it...

Al Gore fly's around the world in his private JET marketing his global warming myth and then he deducts the cost of JET fuel! Yes if you own a Jet you to can deduction that cost as a Business deduction.

June 07 2012 at 9:21 AM Report abuse rate up rate down Reply