- Days left

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

×
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.

Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

TurboTax Articles

Are Losses on a Roth IRA Tax Deductible?

When the value of your investments in a Roth IRA (Roth Individual Retirement Account) decreases, you might wonder if there is a way to write off those losses on your federal income tax return. Find out what you can and can't write off when it comes to your Roth IRA.

Video: Save Taxes by Saving Energy

Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. From basements to attics, the federal government wants homeowners to save energy year-round. They're even willing to pitch in with tax credits for energy-efficient improvements.

Video: Making Work Pay Tax Credit 2009

Note: The content of this video applies only to taxes prepared for 2009 and 2010. It is included here for reference only. Most Americans enjoyed an instant tax break last year thanks to the Making Work Pay Tax Credit. But some may face an unexpected tax bill in April.