Are There Special Tax Breaks For High Income Taxpayers?

There's no shortage of tax breaks for low- to moderate-income taxpayers, and for good reason. To name just a few, the American Opportunity credit makes college more affordable, the child care credit helps parents work, and the Retirement Savings Contributions Credit helps low-income Americans save for retirement. But, what about if you're fortunate enough to be in a higher income bracket?

The short answer
Are there any special tax breaks for high-income taxpayers? Not really. In fact, many of the most lucrative tax breaks aren't available to higher-income individuals – such as the three I mentioned earlier.

Having said that, while there aren't any tax breaks specifically intended for high-income taxpayers, there certainly are some that benefit the rich more than anyone else.

Long-term capital gains tax rates
When you sell an investment that you've held for more than a year, the profits are taxed at favorable long-term capital gains rates. And, when stocks pay qualified dividends, they are also taxed at a lower rate than ordinary income.

Depending on your tax bracket, your long-term capital gains and dividends are taxed at 0%, 15%, or 20% -- all of which are lower than their corresponding marginal tax rates. Here's a rundown of the various rates:

Now, this isn't specifically designed for the rich. These lower tax rates are intended to encourage investment by all Americans. However, the rich are the clear beneficiary of this tax break, as most capital gains are made by the top earners. In fact, 70% of the benefits of lower capital gains tax rates are realized by taxpayers who earn $1 million or more -- just 0.3% of American taxpayers.

Mortgage interest
The IRS allows taxpayers to deduct the mortgage insurance they pay. While this tax break can technically benefit every homeowner, it does favor the rich, for a few reasons.

First of all, in order to take advantage of this deduction, you need to itemize. If the standard deduction is more than your deductions including mortgage interest, this tax break doesn't help you at all. According to TaxFoundation.org, there is a dramatic difference in the number of itemizers in higher income brackets. For example, just 23% of households with adjusted gross income between $30,000 and $40,000 itemize. For households with AGI between $75,000 and $100,000, 65% of tax returns itemize. And, for households earning $200,000 or more, virtually 100% itemize deductions on their returns.

Secondly, the deduction may be taken on a first and second home, provided the original amount of mortgage debt in question is less than $1 million. As you can probably guess, many more high-income taxpayers own second homes. As I pointed out in a previous article, this tax break has even allowed some people to write off interest paid on a yacht, since it technically meets the IRS's criteria for a second home.

Estate tax and gift tax exemptions
This may seem odd -- after all, isn't the whole point of the estate tax to increase taxes on the wealthy? Well, yes, but there are exemptions that definitely favor the rich.

First of all, there is a lifetime exclusion amount before the estate tax even kicks in. As of 2016, the first $5.45 million of an estate is 100% tax-free, and the vast majority of estates (even those of high-income individuals) fall well short of this limit.

And, the annual gift tax exemption clearly favors the rich, as it's geared toward individuals whose estates are over the lifetime exemption. Currently, the gift tax exemption allows a $14,000 annual gift per person that doesn't count toward the lifetime exclusion. As an example of how this works, let's say that a wealthy individual has three children (all of whom are married) and six grandchildren. Theoretically, this person could give away $168,000 tax free every year that won't count toward the estate tax exclusion.

Are these tax breaks fair to the rest of us?
Technically, these tax breaks apply to all Americans. Anyone who owns a single share of stock can take advantage of long-term capital gains rates, provided they hold the stock for more than a year. Any homeowner has the ability to deduct mortgage interest. And, anyone can leave property valued at less than $5.45 million to their loved ones.

Further, even though these benefit the rich, there are solid arguments to be made in favor of each one. Corporations pay taxes on their profits, so why should their investors have to pay even more taxes when collecting dividends and selling shares? The mortgage interest deduction helps make homeownership more affordable for millions of Americans. And, wealthy individuals were taxed on their income when it was earned. Why should the government get another cut of it when these people die?

To sum it up, there are certainly some tax breaks that favor high-income taxpayers, but not unfairly so. These are just three situations that are much more common among the highest earners, so they reap most of the benefits of the associated tax breaks,