Does the Tax Code Really Favor the Rich? You May Be Surprised at the Answer
Whether you're a low earner, a middle-income earner, or someone with a million-dollar paycheck, you probably feel the same way about taxes -- you'd like to pay as little as possible. The good news is that the tax code is loaded with opportunities to help filers pay the IRS less money. Between credits and deductions, there's a host of ways to whittle down your tax liability.
Well-dressed mature couple enjoying wine with a fancy meal.© Getty Images
Now you'll often hear that all of those tax breaks are designed to benefit the rich more so than lower-income households and average earners. But is that true? We asked Mark Steber, Chief Tax Information Officer at Jackson Hewitt, and here's what he had to say.
Everyone has an opportunity to save money on taxes
It's easy to see why some people might think wealthy individuals benefit more from tax breaks than those who aren't. There are certain deductions that those with money are more likely to be able to use.
You can take a deduction on your taxes, for example, for money contributed to a traditional IRA account. If you don't earn a lot, you may not be able to fund one of these retirement plans, whereas if you're wealthy, doing so might be a lot easier. So it's possible to argue that this specific deduction is more accessible to the wealthy.
Similarly, those who itemize on a tax return can deduct their mortgage loan interest. Lower earners are less likely to be able to afford to buy a home, so they may be less likely to get to claim this deduction.
Also, tax deductions themselves can be worth more money to higher earners than lower ones. The reason? A tax deduction, unlike a tax credit, exempts a portion of your income from taxes (whereas a credit is a dollar-for-dollar reduction of your tax liability). If you claim a $1,000 tax deduction and fall into the 22% tax bracket, that deduction may be worth less to you than it is for someone who falls into the 37% tax bracket.
On the flipside, though, "a lot of the tax benefits in the code are phased out for high-income tax filers," says Steber. The American Opportunity Tax Credit, for example, which is a credit designed to help offset education costs, phases out for higher earners. If you're single and earn more than $90,000, you can't claim the credit at all. So clearly, in some cases, being a higher earner means losing out on tax breaks -- not the other way around.
A system that's designed to be fair
When it comes to tax breaks, "there's something in [ the tax code ] for just about everybody," Steber. "Tax benefits are not reserved for the rich by any means."If you're eager to reap as much tax savings as possible, your best bet may be to sit down with a tax professional, review your financial situation, and find ways to minimize your IRS liability. In fact, it's a good idea to meet with a tax professional outside of the tax-filing season so you can strategize on ways to eke out savings not just on a single return, but in general.
