The Office of Management and Budget reports that between 2010 and 2018, the wealthy paid an average of 8.2 percent of their income from their wealth, and a large part of their wealth went untaxed. There are 22 different tax brackets in 2022, with the highest rate at 37 percent, making the taxation system confusing at best.

That estimate is at odds with millionaire Warren Buffett’s statement in 2013, who famously said he pays lower taxes than his secretary. The wealthy pay less in taxes for multiple reasons. The first is that their income is derived from dividends, stocks, and capital gains from investments, rather than wages, that are taxed at a lower rate of 20 percent.

Additionally, a tax code feature called “stepped up basis,” says gains on an asset is never subject to income tax if an asset isn’t sold during the owner’s lifetime. That continues when the wealthy pass it on to their heirs.

That means that a significant amount of the wealthy’s income will never appear on their income tax return. A study by the White House in Sept. 2021 showed that the wealthy paid an average of 8.2 percent in actual taxes, while the typical middle-class family paid 13.3 percent.

Taxes are just one component of a highly complicated and complex tax code that enables the ultra-rich to pay a small fraction of taxes on their actual wealth. They use legal loopholes that includes depreciation, hiring their children, deducting business expenses, and rolling forward business losses.

Other legal methods of avoiding income taxes are deducting interest payments on debt, claiming investment losses, and like-kind exchanges of property. The wealthy also claim a deduction when they transfer money to their own philanthropic foundations.

For millions of Americans, the avenues used by the wealthy aren’t available to the average taxpayer. It’s also interesting to note that in the 1950s and 1960s, the federal income tax rate was 91 percent for the wealthy, down from 94 percent in 1944-1945. The tax rate for the wealthy has steadily been decreasing since then.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

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Knowing how to minimize your tax liabilities can help you avoid having to pay too much in taxes or using up too much of the tax season. Ways to minimize tax liabilities for your business include: Using an accountant or CPA. A certified public accountant will help you create a comprehensive year-end tax strategy, which can be used to reduce both your taxable income and your taxes. Accountants will also help you with tax-deductible expenses such as those related to buying equipment, selling assets, or increasing your tax deductible business expenses.

Create a Budget for Tax Liabilities Your budget should include a list of all your income, expenses, and assets. Divide income into your tax liability category in order of highest to lowest. Include your total annual expenses, including mortgage, insurance premiums, and property taxes. Add your investment earnings and include the total amount you pay to rent, repair or improve the house, and any other miscellaneous expenses. Do not include retirement contributions and interest income on retirement accounts or pensions.

Maximize your deductions When you are trying to minimize your tax bill, consider being audited by the government. Audits are designed to identify areas where business owners can make improvements to their business in order to minimize their tax liability. Some auditors will suggest that business owners meet with them before the audit to discuss their income taxes and assets.

Be sure to calculate a tax-free allowance If you don’t have enough taxable income to meet the asset limitation on your return, you may want to calculate a tax-free allowance. The tax-free allowance is the maximum amount of money that you can claim on your tax return for each taxable income class. For most people, the tax-free allowance is around 50% of their income. It is possible to increase this allowance over time, especially if you meet the eligibility requirements.

Estimate taxes payable annually One way to minimize your tax liabilities is to make an educated guess at how much you will owe. This method, though imperfect, will provide a ballpark figure for you. Many tax professionals will encourage you to make an annual estimate of taxes payable. Estimations are available from different sources such as the Internal Revenue Service, the Social Security Administration, and your own payroll processor. If you don’t have access to these sources of information, there are many websites that offer free tax planning advice and tools.

All these steps will help you reduce your tax liability. Be prepared when tax season comes and do your homework. Educate yourself about income tax liabilities and strategies that could reduce your tax liability. You can always adjust your estimated tax liability for the current year when tax season arrives.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

Contact Us Today