In this informal instructional video, the presenter walks through how the U.S. tax code treats different income groups and outlines strategies that higher‑income individuals use to minimize taxes. He begins by questioning what "rich" means and then describes three broad tiers: low‑income earners (below the poverty line) who can access free VITA filing and refundable credits; middle‑class earners who benefit from various tax credits that begin to phase out as income rises; and high‑income earners (often above the phase‑out range) who face 40% marginal rates and employ sophisticated planning. For the wealthy, he explains gifting up to the annual $17,000 exclusion to reduce future estate tax, the advantage of investment income taxed at lower capital‑gain rates, and tax‑loss harvesting to offset gains. He also details hiring one’s children to shift income and avoid payroll taxes, noting age limits and deduction benefits. Throughout, he emphasizes that the entire tax code is available to everyone, but proper advice is crucial, especially for business owners planning a future sale, as aggressive tax reduction can depress perceived profitability. The video concludes with a call to consult a tax professional and a light‑hearted critique of the IRS.
Chapters
What? Paying taxes like the rich. Um, question we had gotten recently. What a loaded question. Um, the reality is, what is rich? How do you even define that? And that's a whole nother conversation that, you know, is it money? Is it assets? Is it feeling happy? Is it being content with what you have? But I understand the question, but I wanted to clarify from a standpoint of the tax code. The reality is there's more than just rich and not rich. You have people who the income they make is below the poverty line. And most of those people don't even have the ability to afford to pay someone to do their taxes. One of the good things the IRS has done is there are stations called VITA labs, Voluntary Income Tax Assistance, where people who make lower dollars of income are able to go and get their taxes filed for free. Because for a lot of people who make under the poverty line, there are chances, there are credits that the politicians have set up as part of their entitlement programs that allow these types of taxpayers to actually get money back even though they didn't pay any money in. Then you have from the poverty line to call it middle class, which, you know, according to if you believe everything you're hearing, that's shrinking, but it's still a definition we can use when it comes to this scale of thinking about paying taxes like they're rich. A lot of times then the goal becomes there is how do I get my taxes as low as possible because I've made enough to pay taxes. The reality is also in that section from poverty line to middle class, there are a lot of credits that usually help people get more money back than what they paid in. Past middle class, they're becomes this area that the politicians have created, and I don't know what word they use for those people. I don't mean it that way, as in those people, but I don't know the words that they're using, but all the benefits of the tax code start phasing out, meaning once I make a certain dollar amount, I don't get the tax benefit that I would have gotten had I made a little bit less money. And those are benefits like, that go away, that are like, if I contribute to a retirement account, certain ones don't give me a tax deduction anymore. I'm not allowed certain credits like child tax credits, earned income credits, things like that. Okay, so there's that area, and their goal usually is how can I get my taxes under that income amount, like what strategies can I implement so I still get the benefit of the credit? But then from there, once you're past the phase-out area, there's a whole nother— like, it's— think of it as like a book, a book, a book, and then past that, it's a whole brand new series of books that can be used by people to do all sorts of crazy— I shouldn't say crazy, but creative, interesting things that the tax code allows to minimize taxes as much as possible. Because at that point, You're talking about, you know, 40% taxes that these guys are paying. So a lot of strategies exist so that, you know, when they save money, you know, they're saving 40% in tax savings because they now don't have to pay that. So somewhere past the phase-out stage that I described to uber, uber wealthy people, that's Kind of what I think most people refer to when they say, like, paying taxes like the rich, because most of those guys then have a lot of professionals involved, they have fancy estates and trusts, that type of planning going on. So, like, for example, at that level of income, gifting money to people is a way to reduce taxes. Now, that's not an immediate, I get to reduce taxes that year, But because I can gift right now in '23 up to $17,000 a year tax-free, I can get $17,000 out times however many people I gift outside of my estate. So now I would have less taxes in the future. And because it's a gift, the person receiving the gift doesn't pay taxes. I don't know if you guys knew that. The tax issue when sending gifts is the giftor The one sending the gift is the one who the IRS wants to make them pay taxes on it, not the one receiving the gift. So obviously common gift receivers are children or grandchildren, so children or your children, spouses, there's a rule you can gift as much money to your spouse as possible. Now if you have married children, the gifting can go to your child and then your— Spouse. child's spouse, but that's a strategy that they use to lower how much of their estate at some point in the future will end up getting taxed. So it's not immediate tax savings, but that's the type of planning that they're doing, is they're trying to have their personal estate that ends up getting taxed get smaller and smaller. Now, another thing that wealthy people do is that They invest their money because income from investments has a lower tax rate than income from like getting a salary or direct business income that you contribute. As like, I'm a president of the company and I'm working in the company, I'm going to pay an ordinary tax rate on that income versus giving money and just owning equity in a business that I don't have any— day-to-day responsibilities. That type of investment income is taxed a little bit differently. Now you could argue, and I do want to get on my soapbox here for just a second, that it is a little silly because I paid tax on the money that I used to put in the investment, and now that that investment is growing because I made a good decision, I'm penalized for doing a good job with money I already paid tax on. And now I get to pay tax on it again. You could argue that there's an element of being— of double taxation there, but look, buying votes costs money, people, and politicians need votes bought. I love my country, I love the freedoms, but man, there's some stuff broken for sure. Another thing, and this is a strategy that some people will say, hey, this is like paying taxes like the rich, but the reality is anyone who has stock trading going on can take advantage of this strategy. It's called tax loss harvesting. So if I have investments, and most people buy stock, but the reality is you can buy private stock in actual companies that have equity in those companies, or if you follow programs from some really smart people, you can actually get equity in businesses with no money down. But anyways, if I have an investment, whether that's a stock or a business, and it gets sold at a loss, the default rule is that I'm allowed to take $3,000 a year of that loss until the loss no longer exists. Now, I've had clients who have lost hundreds of thousands of dollars in the stock market, Maybe on crypto. And look, $3,000 a year, they would be about 362 years old before they would be able to take advantage of the full amount of money that they lost. So I can do tax loss harvesting where if I have an investment loss here, I can sell other investments that I have that have gained money. I sell that. Now I have the capital gain on this side of the equation, but I have my loss over here, so I'm basically forcing some gains to offset the loss. Now how does that benefit me? If I sell something at a gain, I can then turn around and buy it again if I want, but what I've done is I've stepped up my basis, which means in the future I won't need to pay pay tax on the full gain that I experienced because I basically paid tax now, but I didn't actually pay tax now because I have the loss to offset it now. So that's something that people do, it's called tax loss harvesting. And another strategy that the rich do, but even some of our clients who, they would say, I don't feel rich, but they have a business and they want to lower their taxable income, they hire their children. It's— there's definitely a lot of details, and this would need to be a longer video to include all the details about hiring your children, but feel free to look at our blog at insighttax.com. Maybe we'll even have a link below of another video that we've done already about hiring your children, but you can employ your children in an unincorporated business And then you don't pay payroll tax on that money that goes to your children. And if you're paying your children under the standard deduction, which as of this video is $12,500, they don't pay income tax on it either. So they're already costing you a lot of money. You might as well have them start paying for all the stuff that you were paying for out of your own pocket. Just pay them and then make them responsible, but you get a tax deduction for it. Now, the payroll tax savings, I don't want to call it a loophole because it's not a loophole, it's the law. The law that allows you to not pay payroll tax only works until your children are 17 and a half. Older than that, it doesn't work anymore, so you do have to pay payroll tax. Now, that being said, we do have clients who successfully use this. Mm-hmm. If I'm in a 40% tax bracket and my child's in either a no tax bracket or a 10% tax bracket, yeah, I pay 15%. And even if you add the 10% tax, they're paying 25% total tax on money that I pay them. That's still a 15% savings in taxes. Compared to if I pulled it and just gifted it to my child. And so that's another way, that's a tax arbitrage play. So depending on the age of your children, you can either have a complete tax-free transaction that reduces your taxable income, they don't pay tax, or they end up paying a tax, but it's still a smaller percentage than what you would've paid. So those are some ideas on paying taxes like the rich. But the reality is the whole tax code is available to every person, and that's why it's important to have a good tax advisor to help you walk through those scenarios on what applies to what you're trying to accomplish. Because there does come a time, especially for business owners, I get it, and a lot of businesses stay in the area where it's, I just want to reduce my taxable income. But if you're ever wanting to sell your business in the future, At some point before the sale, you're going to need to stop worrying about lowering your taxes because it makes your business look arbitrarily less profitable than it is, which affects your sale price, which a lot of business owners are relying on that sale price to let them usher in their era of retirement. So again, it's really important based on your specific scenario that you talk to a tax advisor We are happy to help. We have lots of videos, and depending on services that our clients sign up for, you can get access to one-on-one with a tax professional. So thanks again, hope that helps, and remember, the IRS still does very much suck.
