Tax code: here’s who benefits the most

The tax code grants largesse to low-income and wealthy taxpayers. This raises the question: which group receives the most largesse? Low-income taxpayers can receive refundable credits, such as the Earned Income Tax Credit, which recovers more money than is paid. Wealthy taxpayers benefit greatly from the base increase which erases unlimited amounts of capital gain tax. An unlimited tax exemption is rather generous and quite impossible to maximize!

So who gets what? And what does this mean for each of us?

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Bio: Jean-Luc Bourdon, CPA, PSF, wealth advisor

Who gets the most valuable tax benefits?

It would be fun to poll both groups and ask who they think Uncle Sam’s favorite nieces and nephews are. But for a more reliable answer, let’s turn to the Government Accountability Office. The Tax Provisions Assessed by the Argentine Government that are family-oriented, that benefit taxpayers below certain income thresholds, and compared them to wealth-oriented provisions.

Recommended reading: What are tax codes

The conclusion: “Tax expenditures for certain provisions that are more favorable to wealthy households (…) are greater than expenditures for family-oriented provisions. For example, the chart below shows that wealth-focused provisions total about $252 billion, while family-focused credits total about $187 billion in lost income.

Source: United States Government Accountability Office

Source: United States Government Accountability Office

The Argentine public authorities point out that they have of course not taken into account all the provisions of the tax code. But I’d say it’s good enough to give us a general idea.

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What the tax code means for you

You might conclude that to get the greatest tax benefits, it is better to be wealthy than a low-income taxpayer. Not so fast. Can’t we be both? In fact, this opportunity is quite common. Of course, we’ve all heard of billionaires with little taxable income. But tax loopholes for tycoons are exclusive perks. The increasingly common situation is the result of a confluence of widespread retirement trends. That means it might be available for the rest of us.

Reaching the Golden Age of Tax Planning

Consider three elements that affect modern retirement. First, instead of getting a pension to pay for their retirement, Americans typically accumulate wealth in tax-advantaged accounts, like a 401(k) or an IRA. Second, where applicable, we need to start taking the required minimum distributions (RMDs) from retirement accounts at age 72. Third, Social Security can make deferring retirement benefits until age 70 attractive. Therefore, several years may pass between the time we retire and the time we have to claim social security and take RMDs. Indeed, according to Gallup, Americans retire in their early 60s.

During this hiatus period, retirees might have high net worth but manage low income. Think of it as reaching a golden age of tax planning to explore some of the tax code’s most generous provisions. For example, some retirees might take advantage of the 0% capital gains tax rate and reap gains to make the most of it. Some who retire before qualifying for Medicare at age 65 might even qualify for a large tax credit on health insurance premiums. More generally, this is an opportune time to consider Roth conversions.

Overall, the multitude of options available for retirement savings, including taxable, tax-deferred, and tax-exempt accounts, offer various money taps that could be adjusted as needed to optimize taxation. throughout the retreat. Financial complexity promotes opportunity.

Other Low Taxable Income Planning Opportunities

At life’s limit, high medical deductions can result in low taxable income. Increased longevity and expensive long-term care make this all too common. Then, looking to make full use of medical deductions can be very valuable. Low income can also be the temporary result of taking a sabbatical, starting a business, or providing care. Whenever our incomes drop, the tax code is the juicer for squeezing the proverbial lemonade.

To benefit from the most generous tax advantages, it is wise to build up assets and optimize periods of low taxable income. The modern retreat often begins and sometimes ends with such periods. Self-funded retirement also calls for the accumulation of assets, and the tax code provides considerable incentives. Wealth-building incentives and low-income tax breaks can merge strongly when we reach the golden age of planning, and the tax code gives us the best of both worlds.

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Editor’s note: This article is provided for general information and educational purposes only and is not intended to be used as specific financial, accounting, legal or tax advice. Individuals should speak with qualified professionals based on their personal circumstances. The analysis in this article may be based on information from third parties and may become obsolete or otherwise superseded without notice.

Content has been reviewed for tax accuracy by a TurboTax CPA expert.

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