You've probably heard some politicians going on about how the ultra-wealthy pay a lower effective tax rate – taxes paid as a percentage of income, rather than tax bracket – than working class or even many upper middle class people. And it's true, and it seems inherently unfair.
While wealthy people certainly have the money to throw at lawyers & CPAs to help them avoid taxes, one of the biggest sources of tax savings for the wealthy rarely gets discussed – and it's available to EVERYONE.
They save on taxes by owning companies.
Business ownership has huge tax advantages. First, money that you receive as an owner (rather than as an employee) avoids taxes like FICA or Self-Employment Tax (which both go to pay for Social Security and Medicare). That means that you save about 15% on money received as an owner compared to money earned as an employee.
But that's just the tip of the iceberg. Corporations – even small ones – can distribute profits in the form of dividends. If you've been a shareholder for more than one year, those dividends are considered "qualified" and are subject to more favorable tax rates.
And, if you've owned your shares for over one year, you also get the same tax break on capital gains taxes when you sell. No matter what tax bracket you're in, including the absolute top bracket, you will pay less taxes on qualified dividends & long-term capital gains than on earned income.
That's why the wealthiest 10% of Americans own about 93% of all stocks. It's not just that the very wealthy gobble everything up (which they do), but also that it's a tax-efficient way to generate income. The more their income is tied to business ownership, the lower their taxes. By contrast, the bottom 50% of Americans own just 1% of all stocks.
While people like us can't just go out and buy companies whenever we want, we can own parts of companies by purchasing stocks. And the public markets are named that for a reason: anyone can participate, regardless of income or wealth. With advances in technology, transaction fees have disappeared and the rise of fractional trading makes it possible to get started with even a very small amount of money.
In a nutshell, it's never been easier for regular people to participate in owning companies, which opens the door to the kinds of tax breaks that the very wealthy enjoy. I don't have any data to back this up, but I believe that stock ownership is perhaps the only way that ordinary people can enjoy the same benefits of the ultra rich when it comes to saving on taxes and building wealth.
Have any questions about your own investments? Or want to get started, but don't know how? Shoot me an email! I'm happy to answer any questions.
Thanks,
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify your current strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.
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