5 Tax Deductions That Favor The Rich Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: December 07, 2011 Jay MacDonald Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. It s good to be rich
When it comes to tax deductions, it is good to be rich — the richer, the better. Middle-class America enjoys some of the same tax breaks as the wealthy on things like the mortgage interest on home loans, capital gains on retirement investments and donations made to charity. However, the rich enjoy these deductions and others to a wildly disproportionate degree when compared to the rest of taxpayers. According to the National Priorities Project, America’s top earners will get an average tax cut of $66,384 in 2011 while the bottom 20 percent will realize an average tax savings of about $107. Seth Hanlon, director of fiscal reform for the Center for American Progress, says that while all tax breaks are well-intended, the “upside-down” nature of some miss their target. “Most people don’t see these as being government expenditures, but from an economic and budget point of view, they’re really the same thing as programs that spend money directly,” says Hanlon. “There are ways to reform them to make them work better.” Many agree, including President Barack Obama, Warren Buffett and Bill Gates. Here are five tax deductions that help the rich get richer. Mortgage interest a homeownership incentive
The mortgage interest deduction on your federal tax return is intended to encourage homeownership by giving you a tax break on the interest you pay on your house note. There is little question it benefits millions of middle-class homeowners as well as the wealthy. But does it provide a compelling financial incentive to own rather than rent? Not so much. According to a study by The Wharton School at the University of Pennsylvania, mortgage interest deductions for households with incomes between $40,000 and $75,000 average just $523, while households with incomes above $250,000 enjoy an average write-off of $5,459, or more than 10 times as much. You must itemize on IRS Form 1040 Schedule A to claim the deduction. If you do, you can also deduct the interest paid on a second home. The rich do both, but most of the middle class does neither. “For millions of taxpayers, therefore, the mortgage interest deduction provides no added incentive to buy a home,” says Hanlon. “It makes no sense in terms of targeting the incentive at the people who need or could use it.” Capital gains how the rich get richer
Why does billionaire Warren Buffett pay less income tax than his secretary? Two words: capital gains. Long-term capital gains, which derive from the sale of investments such as stocks and bonds held for more than a year, are taxed at 15 percent. That’s well below the 35 percent maximum tax rate on ordinary income such as wages. The preferential tax treatment of capital gains is widely viewed as regressive because the rich, who derive a disproportionate share of their income from capital gains, pay less than half of the tax rate on that income compared to middle-class wage earners. “Capital gains are highly concentrated,” says Rebecca Wilkins, senior counsel for Citizens for Tax Justice. “Most of the capital gains are earned by folks in the top 10 percent, and it’s even concentrated more than that. So the capital gains tax break, which is a 20 percentage-point difference in the amount of tax that is paid on those, is going almost all to the top 5 percent.” In fact, Americans with an annual income of $1 million or more, or 0.3 percent of all taxpayers, enjoy 70 percent of the capital gains benefit, says Hanlon. The favorable capital gains rate is expected to save the wealthy (and cost Uncle Sam) $38.5 billion for fiscal 2012, according to the Office of Management and Budget. Step-up in basis how the rich remain rich
If the wealthy enjoy roughly $40 billion in tax breaks each year thanks to the favorable 15 percent capital gains rate, their heirs save even more, courtesy of the step-up in basis rule in the U.S. tax code. What’s the step-up all about? Essentially, it allows the wealthy to pass along assets that have grown in value to their heirs without ever paying a dime of taxes on it. Under special Internal Revenue Service inheritance rules, when you inherit assets such as stock, real estate or a closely held business, you are allowed to step up their basis — what the deceased originally paid for them — to their current fair market value. Therefore, when you sell the assets, you would only be taxed on their gain in value from the time you inherited them. Step-up in basis is expected to save the wealthy (and cost Uncle Sam) $61.5 billion for fiscal 2012, according to the Office of Management and Budget. “Not surprisingly, this tax expenditure overwhelmingly benefits those who inherit from large estates because it allows gains to escape capital gains taxes if held until death,” says Hanlon. Retirement savings tax shelter for the rich
Tax-deferred retirement plans are designed to help all Americans save for retirement. In 2011, Americans will save (and Uncle Sam will lose) $142 billion in taxes by sheltering their personal income in 401(k) plans, pension plans and individual retirement accounts, according to the U.S. budget. Since the wealthy have more to save, they tend to reap more of the tax benefits of saving for retirement. According to the Tax Policy Center, the top 20 percent of income earners enjoy 80 percent of the tax write-offs for retirement saving while the bottom 60 percent take advantage of a whopping 7 percent of the tax savings. Which is understandable considering that the higher your income, the more likely you are to own a 401(k) plan with generous employer contributions. Nearly half of all Americans do not have access to a retirement plan at work, and those who do can’t afford to take full advantage of the tax incentive. “It’s, again, a question of targeting incentives,” Hanlon says. “The tax benefits probably aren’t as well-targeted as they should be. The wealthy probably would save regardless of the tax benefit.” Charitable deduction good cause policy flaws
The charitable-giving deduction effectively operates as a federal matching program: make a charitable donation and receive a tax break. In fiscal 2011, the charitable deduction saved Americans (and cost Uncle Sam) $53.7 billion, according to the U.S. budget. The problem with the charitable deduction is similar to the mortgage income tax break: The value of the deduction increases with income. “If I give $1,000 to charity and I’m in a 10 percent tax bracket, I get $100 back on my taxes,” says Wilkins. “But if I’m in a 35 percent tax bracket, I get $350 back from the federal government.” Plus, you have to itemize on IRS Form 1040 Schedule A to claim the charitable deduction. “If we’re trying to encourage charitable giving, we should be encouraging people with less money than people with more money to make those gifts,” Wilkins says. Related Links: Related Articles: SHARE: Jay MacDonald Related Articles