What are the common income tax deductions used by “rich” salaried households?
"You're asking explicitly about $250K+ wage earners. Well, believe it or not, but this is the most discriminated group of people in the US tax code. This is what is called ""the upper middle class"". People who still have to work for a living, but treated as if they're rich (I don't consider people who must work to keep up their life style as rich). Many of the deductions cannot be taken by them. Lets go over the list Keith made: You mentioned losses - you cannot deduct gambling losses (in excess of gambling income), and you cannot deduct passive (rental real estate, for example) losses. While for rental real estate there's a small amount of losses you could deduct, it phases out well below the $250K line (can be deducted against passive income, or when disposed of the property). 529 plans are not deductible (in fact, its a gift subject to the gift tax). Bottom line, being a high earner with wages only means you pay the most tax. You either find a way to become self employed and have a lot of business deductions on your schedule C/1120S, or switch to capital gains. You can marry an unemployed partner, it will make your life slightly easier." The $250K and up are not one homogeneous group. The lower end of this group benefits from normal Schedule A itemized deductions, e.g. mortgage interest, property tax, state income tax, and charitable donations. As you mention, 401(k) ($17k employee contribution limit this year), but also things like the dependent care account ($5k limit) and flexible spending account, limited usually up to $2500 in '14. The 529 deposits are limited to the gifting limit, $14K in 2014, but one can gift up to five years' deposits up front. This isn't a tax deduction, but does pull money out of one's estate and lets it grow tax free similar to a Roth IRA. The savings from such accounts is probably in the $15k - $20K range given the 20 or so year lifetime of the account and limited deposits. At the higher end, the folks making the news are those whose income is all considered capital gains. This applies both to hedge fund managers as well as CEOs whose compensation included large blocks of stock. This isn't a tax deduction, but it's how our system works, the taxation of capital gains vs. ordinary income. One of the main tax loopholes more readily available to the wealthy in the U.S. is the fact that long-term capital gains are taxed at a much lower rate. Certainly, people making less than $250,000/year can take advantage of this as well, but the fact is that people making, say, $60,000/year likely have a much smaller proportion of their income available to invest in, say, indexed mutual funds or ETFs. You may wish to read Wikipedia's article on capital gains tax in the United States. You can certainly make the argument that the preferential tax rate on capital gains is appropriate, and the Wikipedia article points out a number of these. Nevertheless, this is one of the main mechanisms whereby people with higher wealth in the U.S. typically leverage the tax code to their advantage. "From Rich Dad, Poor Dad. 3 Major Things: With rental real estate, in addition to mortgage interest, you also deduct property taxes, and must claim depreciation (cost of house / 27.5 years) Business Expenses. For example, buy a yacht and put it in a charter fleet. Deduct interest on the loan, depreciation of the asset, property taxes, upkeep of the boat. Your ""business"" earns profit from chartering the boat, which if I recall correctly is taxed at a lower rate. You get to go sailing for free. Then there was the concept of subdividing the businesses. If you own a restaurant, create another business to own the property, and the equipment used in the company. Then lease the equipment and rent the land to the restaurant. Now admittedly I thought this was like the Daylight Savings plan of tax avoidance, I mean now aren't you essentially having two companies paying half the taxes. I am sure there are well paid CPAs that make the math happen, perhaps using insurance plans.. Perhaps each business funds a ""whole life"" insurance account, and contributes vast amounts into that. Then you take a loan from your insurance account. Loans of course are not income, so not taxed. The third way is to create your own bank. Banks are required to have reserves of 9%. Meaning if I have $100 dollars, the FDIA allows me to loan $1,111. I then charge you 20% interest, or $222/yr. Now how much can I loan?  ...well you can see how profitable that is. Sure you pay taxes, but when you print your own money who cares? Most of this is just gleamed from books, and government publications, but that was my general understanding of it. Feel free to correct the finer points." "As was stated, households earning over $250k/yr don't all get their income one way. Below that threshold, even in the six figure range, most households are in one of two categories; salary/wage/commission workers, and those living off of nest eggs/entitlements (retired, disabled, welfare). Above $250k, though, are a lot of disparate types of incomes: Now, you specifically mentioned wage earners above $250k. Wage earners typically have the same ""tax havens"" that most of us do; the difference is usually that they are better able to make use of them: In other words, there are many ways for a high-end wage earner to live the good life and write a lot of it off."
It's the percent of your gross income put into savings. You make 60000/year, and save 6000, that's 10%.  You can certainly say that you paid 10000 in tax so you really saved 6000/50000, or 12%, if that will make you feel better, but the saving rate is typically based on gross income. "In your case, I believe the answer is that you don't owe any taxes, if your deductions exceed your income. There is something called the Alternate Minimum Tax to catch ""rich"" people, who claim ""too many"" deductions. Basically, it taxes their ""gross"" income at a lower rate, but allows them no deductions if they make $175,000 or more. You are not in that tax ""bracket.""" "I am going to keep things very simple and explain the common-sense reason why the accountant is right: Also, my sister in law owns a small restaurant, where they claim their accountant informed them of the same thing, where a portion of their business purchases had to be counted as taxable personal income. In this case, they said their actual income for the year (through their paychecks) was around 40-50K, but because of this detail, their taxable income came out to be around 180K, causing them to owe a huge amount of tax (30K ish). Consider them and a similarly situated couple that didn't make these purchases. Your sister in law is better off in that she has the benefit of these purchases (increasing the value of her business and her expected future income), but she's worse off because she got less pay. Presumably, she thought this was a fair trade, otherwise she wouldn't have made those purchases. So why should she pay any less in taxes? There's no reason making fair trades should reduce anyone's tax burden. Now, as the items she purchased lose value, that will be a business loss called ""depreciation"". That will be deductible. But the purchases themselves are not, and the income that generated the money to make those purchases is taxable. Generally speaking, business gains are taxable, regardless of what you do with the money (whether you pay yourself, invest it, leave it in the business, or whatever). Generally speaking, only business losses or expenses are deductible. A purchase is an even exchange of income for valuable property -- even exchanges are not deductions because the gain of the thing purchased already fairly compensates you for the cost. You don't specify the exact tax status of the business, but there are really only two types of possibilities. It can be separately taxed as a corporation or it can be treated essentially as if it didn't exist. In the former case, corporate income tax would be due on the revenue that was used to pay for the purchases. There would be no personal income tax due. But it's very unlikely this situation applies as it means all profits taken out of the business are taxed twice and so small businesses are rarely organized this way. In the latter case, which is almost certainly the one that applies, business income is treated as self-employment income. In this case, the income that paid for the purchases is taxable, self-employment income. Since a purchase is not a deductible expense, there is no deduction to offset this income. So, again, the key points are: How much she paid herself doesn't matter. Business income is taxable regardless of what you do with it. When a business pays an expense, it has a loss that is deductible against profits. But when a business makes a purchase, it has neither a gain nor a loss. If a restaurant buys a new stove, it trades some money for a stove, presumably a fair trade. It has had no profit and no loss, so this transaction has no immediate effect on the taxes. (There are some exceptions, but presumably the accountant determined that those don't apply.) When the property of a business loses value, that is usually a deductible loss. So over time, a newly-purchased stove will lose value. That is a loss that is deductible. The important thing to understand is that as far as the IRS is concerned, whether you pay yourself the money or not doesn't matter, business income is taxable and only business losses or expenses are deductible. Investments or purchases of capital assets are neither losses nor expenses. There are ways you can opt to have the business taxed separately so only what you pay yourself shows up on your personal taxes. But unless the business is losing money or needs to hold large profits against future expenses, this is generally a worse deal because money you take out of the business is taxed twice -- once as business income and again as personal income. Update: Does the business eventually, over the course of the depreciation schedule, end up getting all of the original $2,000 tax burden back? Possibly. Ultimately, the entire cost of the item is deductible. That won't necessarily translate into getting the taxes back. But that's really not the right way to think about it. The tax burden was on the income earned. Upon immediate replacement, hypothetically with the exact same model, same cost, same 'value', isn't it correct that the ""value"" of the business only went up by the amount the original item had depreciated? Yes. If you dispose of or sell a capital asset, you will have a gain or loss based on the difference between your remaining basis in the asset and whatever you got for the asset. Wouldn't the tax burden then only be $400? Approximately, yes. The disposal of the original asset would cause a loss of the difference between your remaining basis in the asset and what you got for it (which might be zero). The new asset would then begin depreciating. You are making things a bit more difficult to understand though by focusing on the amount of taxes due rather than the amount of taxable gain or loss you have. They don't always correlate directly (because tax rates can vary)." You can call what you're asking about a 'wealth tax', or 'capital tax'.  These are taxes not based on income you earned in a year, but some measure of how much you own. Some countries (Italy I believe is a prime example) tax ownership of foreign land. Some countries tax amounts owned by corporations [Canada did this until ~5-10 years ago depending on province]. Some countries strictly tax your wealth above a certain level (Switzerland, as has been mentioned, does this).  One form of what you are referring to that does exist in the US is the 'Estate Tax'. This is a tax on the amount of wealth that a person owns, at the time they die. The threshold for when this tax applies has been very volatile over the last 20 years, but it is generally in the multi-millions, and I believe sits somewhere around $5M. If these taxes start to crop up more and more (and I believe they will), don't be shocked at the initial 'sticker price'. Theoretically a wealth tax could replace some of the current income tax regime in many countries without creating a strict increased tax burden on their people. ie: if you owe $10k in income tax this year, but a $2k capital tax is instituted next year, then you are still in the same position as long as your income tax is reduced to $8k.  Whether these taxes are effective/preferable or not is really a question of economics, not personal finance, so I will not belabour that point. Note: if the money you have saved earns money (interest, or dividends, or maybe rent from a condo you own), then those earnings are typically taxed alongside your wage income. Any 'wealth/capital tax' as I've described it above would be in addition to income tax on investment earnings. I know all too well how it works. That doesn't change the fact that GE didn't pay taxes.   If only my personal expenses such as food, gas, car maintenance, rent could be deducted from my tax liability and then when I operate on a loss (spend more than I receive) use that to get a tax refund. If corporations were people, why do they have a separate tax code? If corporations are people, they would be subject to the same tax code people are.   We have so much corporate welfare via the tax code in this country, that it exceeds the amount of social welfare for poor people. Yes, but how does that compare to those with multiple houses?  I build homes in the Seattle area for a living and one lifestyle who own several rentals... One thing them do is use equity for their 4 homes to purchase another.. Writing off the the interest paid on the loan(s)...  I'm not saying it's a deduction normal people don't use... I'm just saying that it strikes me as a deduction that the wealthiest  landlords use more with better results... "Rob - I'm sorry your first visit here has been unpleasant.  What you are asking for is beyond the capability of most software. If you look at Fairmark.com, you find the standard deduction for married filing joint is $12,200 in 2012, and $12,400 in 2013. I offer this anecdote to share a 'deduction' story - The first year I did my MIL's taxes, I had to explain that she didn't   have enough deductions to itemize. Every year since, she hands me a   file full of paper substantiating medical deductions that don't exceed   7.5% of her income. In turn, I give her two folders back, one with the 5 or so documents I needed, and the rest labeled ""trash"". Fewer than 30% of filers itemize. And a good portion of those that do, have no question that's the right thing to do. e.g. my property tax is more than the $12K, so anything else I have that's a deduction adds right to the number.  It's really just those people who are at the edge that are likely frustrated. I wrote an article regarding Standard Deduction vs Itemizing, in which I describe a method of pulling in one's deductible expenses into Odd years, reducing the number in Even years, to allow a bi-annual itemization. If this is your situation, you'll find the concept interesting.  You also ask about filing status. Think on this for a minute. After pulling in our W2s (TurboTax imports the data right from ADP), I do the same for our stock info. The stock info, and all Schedule A deductions aren't assigned a name. So any effort to split them in search of savings by using Married Filing Separate, would first require splitting these up. TurboTax has a 'what-if' worksheet for this function, but when the 'marriage penalty' was lifted years ago, the change in status had no value. Items that phaseout over certain income levels are often lost to the separate filer anyway. When I got married, I found my real estate losses each year could not be taken, they accumulated until I either sold, or until our income dropped when the Mrs retired.  So, while is respect your desire for these magic dials within the software, I think it's fair to say they would provide little value to most people.  If this thread stays open, I'd be curious if anyone can cite an example where filing separately actually benefits the couple." Isn't that a deduction mostly used by the top 1%? There seem to be mostly 2 types of people, those who own many homes, And those that rent them...  I always thought the mortgage interest deduction was used substantially more by the wealthy than the middle class... (Luxury homes also offer higher deductions right?) "There are tax free bonds in the United States.  They are for things like public housing and other urban projects.  They are tax free for everyone but only rich people buy them.  Why?   The issue is that the tax free nature of the bond is included in its yield.  So rather than yielding say a 5% return, they figure that the owner is getting 20% off due to not paying taxes.  As a result, they only give a 4% return but are as risky as a 5% return investment.  Net result, only rich people invest in tax free bonds.  ""Rich"" is defined here to mean people paying a 20% tax on long term investment returns.   Or take the State and Local Tax (SALT) deduction, which has been in the news recently.  Again, it is technically open to everyone.  But there is also a standard deduction that is open to everyone.  For the typical family, state and local taxes might be 5% of income.  So for a family making $100k a year, that's $5k.  The same family can take a $13k or so standard deduction instead of itemizing.  So why would they take the smaller deduction?   As a practical matter, two groups take the SALT deduction.  People rich enough to pay more than $13k in state and local taxes and people who also take the mortgage interest deduction.  So it helps a lot of people who are rich quite a bit.  And it helps a few middle class people some.   But if you are lower middle class with a $30k mortgage on a tiny house and paying 4% interest, then that's only $1200 a year.  Add in property taxes of $3000 and SALT of $2.8k and that's only $7k.  Even if the person gives $3k to charity, the $13k deduction is a lot better and requires less paperwork.   Contrast that with someone who has $500k mortgage at 3.6% interest.  That's $18k in interest alone.  Add in a SALT of $7k and property taxes of $50k, and there's $75k of itemized deductions, much better than $13k.  Now a $7k donation to charity is entirely deductible.  And even after the mortgage interest deduction goes away, the other $64k remains." "The scenario you mention regarding capital gains is pretty much the core of the issue. Here's a run-down from PolitiFact.com that explains it a bit. It's important to focus on it being the tax rate, not the tax amount (which I think you get, but I want to reinforce that for other readers).  Basically, most of Buffett's income comes from capital gains and   dividends, income from investments he makes with the money he already   has. Income earned by buying and selling stocks or from stock   dividends is generally taxed at 15 percent, the rate for long-term   capital gains and qualified dividends. Buffett also mentioned that some of the ""mega-rich"" are hedge fund   managers ""who earn billions from our daily labors but are allowed to   classify our income as 'carried interest,' thereby getting a bargain   15 percent tax rate."" We don't know the taxes paid by Buffett's secretary, who was mentioned   by Obama but not by Buffett. Buffet's secretary would have to make a   high salary, or else typical deductions (such as the child tax credit)   would offset taxes owed. Let's say the secretary is a particularly   well-compensated executive assistant, making adjusted income more than   $83,600 in income. (Yes, that sounds like a lot to us, too, but   remember: We're talking about the secretary to one of the richest   people in the world.) In that case, marginal tax rates of 28 percent   would apply. Then, there would be payroll taxes of 6.25 percent on the   first $106,800, money that goes to Social Security, and another 1.45   percent on all income, which goes to Medicare. The secretary’s overall   tax rate would be lower than 28 percent, since not all the income   would be taxed at that rate, only the income above $83,600. Buffett, meanwhile, would pay very little, if anything, in payroll   taxes. In the New York Times op-ed, Buffett said he paid 17.4 percent   in taxes. Thinking of the secretary, it gets a little complicated,   given how the tax brackets work, but basically, people who make   between $100,000 and $200,000 are paying around 20 percent in federal   taxes, including payroll and income taxes, according to an analysis   from the nonpartisan Tax Policy Center. So in this case, the secretary's rate is higher because so much of   Buffett's income comes from investments and is taxed at the lower   capital gains rate. Here's Buffet's original Op-Ed in the NYT for those of you that aren't familiar." Rich people use debt for various reasons. The question should not assume that billionaires don't use debt. They also pay lower interest rates on that debt because they have enough collateral that their debt is safer than a typical mortgage. Many rich people will use interest only mortgages on their primary residences so that they can keep their stock earning at higher growth rates than the mortgage interest that they are paying all while writing off a portion of that mortgage interest on their taxes.  Taking an artificially low salary and receiving equity for the larger portion of compensation is also a tax strategy to limit the amount of taxes owed on that income. If paid directly in stock grants, that will count as income, but if paid in options, then the purchased stock will only be taxed at the lower capital gains rates if the stock is held for a year after the options are exercised. Every billionaire will have complicated tax avoidance strategies that will require multi-year planning for the best long-term minimization of taxes. Debt is a strategic part of that planning. Also consider that a major part of that upscale lifestyle (corporate jets, fancy meals, etc.) is on the company dime because the CEO is always on the clock. As long as he is meeting with business prospects or doing other company business, those expenses will be justified for the corporation and not attributed as income. Standard deduction is $6300, and exemption is $4050, totaling $10,350. (For 2016) Twice this for a couple ($20,700). The tax on money just above this is 10%, so the few thousand above will be taxed at a few hundred dollars. Where are you getting the number you showed? Can you edit your question to clarify exactly what you are asking? Is this right? The example is slightly off. Google would be running a cafeteria that can be subsidized. Employees pay an amount to buy food. Not every one spends the same amount or eats the same amount of food. If someone doesn't use cafeteria; he doesn't get more money. For example, suppose John Doe makes $100,000 a year taxed at a rate of 20%, for a take home pay of $80,000. He spends $10,000 on food. His employer Corporation decides to give him all of his food and deduct it as a business expense - costing them $10,000. But now they can pay John Doe an amount so his take home pay will be reduced by $10,000 - $87,500 The company is now spending $97500 employing John Doe, for a savings of $2500$. If a scheme is devised specifically to evade taxes; then it is invalid. In this case Bill may buy groceries worth only $5000. So keep track of which employee buys how much groceries in added cost of Google. Plus one can't really call it a business expense. Do you have any insight on average *effective* rates paid by SE owners?  As a counterpoint to your (very valid) links, filing as S-corp allows for taxes on distributions to be exempt from payroll tax and taxed at much lower rates. Also, being SE allows for various deductions not possible for wage earners. There's probably other examples not immediately coming to mind.  Also, SE taxes equal taxes otherwise paid by employer + employee. It's just that those employer taxes don't appear on the employee's paystub so not everyone realizes this. "You cannot deduct commute expenses. Regarding your specific example, something to consider is that if the standard of living is higher in San Francisco, presumably the wages are higher too. Therefore, you must make a choice to trade ""time and some money for commuting costs"" for ""even more money"" in the form of higher wages. For example, if you can make $50K working 2 hours away from SF, or $80K working in SF, and it costs you $5K extra per year in commute costs, you still come out ahead by $25K (minus taxes). If it ends up costing $20K more to live in SF (due to higher rent/mortgage/food/etc), some people choose to trade 4 extra hours of commuting time to put that extra $20K in their pocket. It's sort of like having an extra part time job, except you get paid to read/watch tv/sleep on the job (assuming you can take a train to work)."