The tax code provides largesse for low-income, high-net-worth taxpayers. This begs the question: which group gets the most generosity? Low-income taxpayers can receive refundable credits, such as the Earned Income Tax Credit, which make it possible to recover more money than is paid. tax. Unlimited tax relief is quite generous and almost impossible to maximize!
So who gets what? And what does it mean for each of us?
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Who gets the most valuable tax breaks?
It would be fun to poll both groups and ask who they think are Uncle Sam’s favorite nieces and nephews. But for a more reliable answer, let’s turn to the Government Accountability Office. the GOA evaluated tax provisions that are family-oriented, benefiting taxpayers below certain income thresholds, and compared them with wealth-oriented provisions.
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The conclusion: “The tax expenditures for some provisions that are more beneficial to wealthy households (…) are greater than the expenditures for family-oriented provisions.” For example, the table below shows wealth-oriented provisions totaling approximately $252 billion, while family-oriented loans total about $187 billion in lost income.
The GOA points out that, of course, it has not considered all the provisions of the tax code. But I’d say this is good enough to give us a general idea.
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What the tax code means to you
You might conclude that for the greatest tax advantages, it is better to be rich than a low-income taxpayer. Not so fast. Can’t we be both? Actually, this opportunity is quite common. Of course, we’ve all heard of billionaires with little taxable income. But tax loopholes for tycoons are exclusive benefits. The increasingly common situation is the result of a confluence of widespread retirement trends. That means it could be available to the rest of us.
Reaching the golden age of tax planning
Let’s consider three elements that affect modern retirement. First, instead of drawing a pension to pay for retirement, Americans often accumulate wealth in tax-advantaged accounts like a 401(k) or IRA. Second, when applicable, we must begin taking Required Minimum Distributions (RMDs) from retirement accounts at age 72. Third, Social Security may make it attractive to delay retirement benefits until age 70. As a result, several years could pass between the time we retire and the time we must claim social security and take RMDs. In fact, according to Gallup, Americans retire at age 60.
During this gap period, retirees may have a high net worth but manage a low income. Think of it as reaching into the golden age of tax planning to explore some of the more generous provisions of the tax code. For example, some retirees might enjoy the 0% capital gains tax rate and reap profits to make the most of them. Some people who retire before they qualify for Medicare at age 65 may even qualify for a hefty health insurance premium tax credit. More generally, it’s an opportune time to consider Roth conversions.
In general, the multitude of options available for retirement savings, including taxable, tax-deferred, and tax-free accounts, provide several taps of money that could be adjusted as needed to optimize taxes in retirement. Financial complexity breeds opportunity.
Other Low Taxable Income Planning Opportunities
At the end of life, high medical deductions can cause low taxable income. Increased longevity and expensive long-term care make this situation all too common. So looking to fully utilize medical deductions can be very valuable. Low income can also be the temporary result of taking a gap year, starting a business, or providing care. Every time our income drops, the tax code is the juicer for squeezing the proverbial lemonade.
To get the most generous tax breaks, it’s wise to build wealth and optimize periods of low taxable income. Modern retirement often begins and sometimes ends with those periods. Self-funded retirement also requires wealth creation, and the tax code provides considerable incentives for it. Wealth-building incentives and low-income tax breaks can combine powerfully when we reach the golden age of planning and the tax code gives us the best of both worlds.
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Publisher’s note: This article is for general information and educational purposes only and is not intended to serve as specific financial, accounting, legal, or tax advice. People should talk to qualified professionals based on their individual circumstances. The analysis contained in this article may be based on information from third parties and may be outdated or replaced without notice.
A TurboTax CPA expert reviewed the content for tax accuracy.