Who Pay taxes in USA?. The 25 richest people in the country paid relatively little or nothing in federal income taxes legally between 2019 and 2021In the United States, only income tax is paid and not wealth tax.

The inequality of the US tax system has been exposed after learning that the 25 richest people in the country – and in the world – paid relatively little or nothing in federal income taxes between 2014 and 2018 .

The information leaked from the IRS and published by the independent agency ProPublica. Thus uncovered the income statement of financial giants such as Jeff Bezos (Amazon), Elon Musk (Tesla), Warren Buffett (Berkshire Hathaway) , Michael Bloomberg  (Bloomberg LP) or  George Soros (investor).

Headlines have inevitably grabbed the front pages of newspapers. And while one of the most debated topics focuses on the vulnerability of confidential information, another discusses how billionaires pay less in taxes than the rest.

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Tax Scandal

“The real tax scandal is that it is legal,” Binyamin Appelbaum wrote in The New York Times on Wednesday. “Rich Americans can save a lot of money by cheating on their federal income taxes, but this is nothing compared to the amount of money they save by following the rules,” he stressed.

And it is that the tax code, judging by the numbers, it seems that it is not designed for the wealthiest, or maybe it is, since the taxes paid on income from capital are lower than the taxes paid for income earned from work. In other words, money obtained by work is penalized more than money generated by wealth.

Some questions then arise about how the Federal Income Tax declaration in the United States? How much is paid? To what extent are withholdings considered? What differences can we find between the US tax system and the Spanish one? the european?

The non-existent estate taxes

The tax system focuses on collecting taxes on annual income, but a family’s wealth is also an indicator of how much profit it has made within the economy and its ability to pay taxes. The richest 0.1% of American families are estimated to owe 3.2% of their wealth in federal, state and local taxes in 2021, while 99% of the rest of the population owes 7.2%.

“The first fundamental difference with Spain is that in the United States you only pay income tax and not wealth tax, that is, you only pay taxes on the money you have generated during the year,” explains NIUS Juan Mercadal, director of OBS INC, a company dedicated to business management and consulting in the United States, located in Miami, Florida, since 2008.

Tax Stages

In US, the tax is progressive and marginal, which means that your income is taxed in stages: “ The progressive tax starts at 10% and the highest bracket is 37% , which is also an important difference . Sure, we’re talking about marginal tax. It is not that you, because you earn more than x money, are going to pay 37% of everything, but that, what exceeds 518,000 dollars is at 37%, which is the maximum that one pays in income tax.

Indeed, the federal brackets in the United States are broader between taxable amounts and have a lower withholding percentage, compared to those established in Spain, visible at a glance if we compare the two tables for the two countries.

As a practical example, it could be stated as follows, considering on the one hand an heir with 500 million dollars in yachts, jewelry and art; and on the other hand, a teacher with no savings in his bank account. If both the heir and the teacher earn $60,000 in earned income in a year, they would pay the same in federal taxes, despite their differing circumstances.

Most business expenses are deductible

Regarding the taxable base, understanding as such the total income minus the allowed deductions, “in the United States you have an exemption, which is a deduction from the income on which the taxes are going to be calculated. If you’re single it’s $12,400, if you’re married it’s $24,800…so the first $24,800 basically doesn’t pay taxes ,” says Mercadal.

“This deduction can also be made ‘by line’, adding the interest you pay on your main home and the Real State Taxes (equivalent to the IBI), which in Miami, for example, is 2% of the value of the property . That is also deductible from the taxable base of taxes.

The exception of the 1% of the population that has capital income

Population & Tax

As in the rest of the countries, the majority of the American population obtains income thanks to work through wages. Or other benefits provided by the contractor. However, the rare top 1% of income often comes from interest, dividends, capital gains. Or rent on your investments, known as capital income . 

Generally, the more someone earns, the higher percentage of capital income and less workers’ compensation they receive each year.

Like the tax base, “the capital balance is also important in the long term”, explains the Spanish adviser Mercadal to NIUS. “If you make less than $50,000 in capital gains, you don’t pay taxes, it’s 0%. The most common is to pay 15% on capital gains, and can reach up to 20%. This is a very big advantage because there are many people who receive a lot of money with capital gains, which are basically buying and selling shares or other stocks.”

Legal strategies to reduce taxes 

As in any legal system that is provided, there are usually ways to defer or avoid taxes on investments. By taking advantage of loopholes and gaps in the system. For example. If someone has $1 million in stock that grows to $2 million, they won’t have to pay taxes on the gains until they sell it.

In addition to reducing the tax impact by timing the sale or offsetting gains against other losses, another possible strategy would be to use appreciated property as collateral to purchase new investments.

On the other hand, it should be noted that millionaires have large tax deductions on numerous occasions. Because they have taken out loans to finance a lifestyle or also through charitable donations. They buy an asset, build one, or inherit a fortune, and then borrow against their wealth. Since they don’t make a profit or sell shares, they don’t receive any income, which is what could be taxed.

“In the case of Bezos or Warren Buffett and other well-known millionaires, they are indeed rich, but what they are talking about is wealth, and again, it is important to remember that wealth is not taxed in the United States. These executives or investors pay taxes on what they withhold from their companies, which is the money they use to live on. And they are super-millionaires, but they are not spending the money that they have as assets,” emphasizes Mercadal.

Federal, state, and local taxes

The payment of taxes, as in other countries of the Organization for Economic Cooperation and Development (OECD). Varies depending on where you live. In other words. While the same federal taxes are paid in the 50 states that make up the United States (at the national level). Each state also has the power to collect taxes on income and sales. In the same way as Local governments collect property taxes.

“In Miami, we are lucky that personal income taxes are not paid, the federal tax is paid but not the state tax, while there are other states. Such as New York or California, where you have the federal. State tax and sometimes you also have a local tax or a City Tax. Depending on each state, the prosecutor’s office in that sense is a little different,” explains Mercadal.

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