3 Tax Breaks That Hugely Benefit the Rich

There's a new administration in Washington, and it appears interested in working with the Republican Party to usher in significant tax-law changes. Overall, the changes are expected to offer more tax relief to the rich than to the poor.

This is vexing to some, as there are already plenty of tax breaks that benefit the rich disproportionately. Here's a look at three ways that the current tax code is friendly to the wealthy.

Image source: Getty Images.

Social Security earnings cap

This tax break is for those who earn more than $127,200. For the tax year 2017, that's the amount of our earnings get taxed for Social Security -- at 6.2% (plus an additional 6.2% from the employer). If you earn $127,200 and your neighbor earns $1,127,200, you'll pay the same Social Security tax. Indeed, for every million dollars someone earns above that cap, they avoid paying $62,000 in taxes.

Some will argue that leaving the cap in place is fair, as incomes don't have much of an upper limit, while Social Security benefits are limited. (The overall maximum monthly Social Security benefit for those retiring at their full retirement age in 2016 is still just $2,687 -- or about $32,000 for the whole year.) Others would counter that, though, pointing out that middle-class and lower-class workers are taxed on all of their earnings, while the wealthy, who might be expected to shoulder a little more of the cost of supporting those in need, are not. (The rich also tend to live longer, collecting more from Social Security.)

A good argument for raising or eliminating the cap is that it could significantly bolster the Social Security trust funds, which will need more funding in the future, unless benefits are cut.

Social Security taxes only apply to income up to $118,500 – anything after that is Social Security tax-free. So the more money you make, the less your effective Social Security tax rate is, making this tax about as regressive as they come. Technically, of course, Social Security is a savings plan, not a tax. But the rich tend to live longer than the poor and receive benefits longer than lower-wage earners, so an adjustment to the earnings limit would help offset this difference. Social Security's own actuaries estimate that eliminating this cap would reduce the program's long-term deficit by about 86%.

Image source: Getty Images.

The capital gains tax rate

Another tax break that disproportionately benefits the rich is the capital gains tax rate that applies to gains we realize from the sale of assets such as stocks as well as to dividends we receive -- because it's lower than most income tax rates. Lower- and middle-income workers have relatively little in capital gains to report on their tax returns, while many wealthy people's income is largely made up of capital gains. Remember that our incomes are subject to tax rates that go all the way up to almost 40%, though relatively few pay more than 25%.

Here are the income tax brackets for 2016, which apply to income earned in the 2016 tax year:

Data source: IRS.gov 

Short-term capital gains (applying to qualifying assets sold that had been held for no more than a year) are taxed at the ordinary income tax rates, above. But long-term gains, for assets that had been held for at least a year and a day, are taxed at 15% for most folks and 20% for those in the top tax bracket. (Qualifying dividends get the same tax rate.) Note that those folks are paying a rate that's just about half of their income tax rate.

This inequality in tax rates is why Warren Buffett has suggested that it's unfair for his tax rate to be lower than that of his secretary. Tax policy expert Seth Hanlon noted in 2011: "The benefits of preferential rates for capital gains are enjoyed by the wealthiest Americans because they're the ones who tend to receive this type of income. More than 70% of the benefit goes to taxpayers with annual income of more than $1 million, a group that comprises only about 0.3% of all taxpayers."

Image source: Pixabay.

The mortgage interest deduction

Finally, there's the mortgage interest deduction. Clearly, it benefits homeowners of all stripes who have taken on mortgages -- but it delivers much more to the wealthy than to those of lesser means. Indeed, a study by The University of Pennsylvania's Wharton School sound that mortgage interest deductions for households with incomes between $40,000 and $75,000 averaged just $523, while households with incomes above $250,000 deducted an average of $5,459 -- more than 10 times as much.

Part of the problem is that to claim the deduction, you need to itemize your deductions via IRS Form 1040 Schedule A. Of course, if you don't have enough in deductions to exceed the standard deduction amount, it's not worth doing so. So many people who do pay mortgage interest don't get to claim the deduction. The wealthy can also deduct interest paid on a second home -- and even on their yachts! (It's not true for any old boat, such a more modest one that a middle-class taxpayer might own -- but it's true for boats with characteristics of homes, such as bedrooms, bathrooms, and kitchens.)

Image source: Getty Images.

Changes afoot

If any of what you've read has irked you, know that there may be more coming. According to the Urban-Brookings Tax Policy Center, here are some tax breaks for the rich that may be on the way:

Republican plans for ACA repeal, which are expected to follow the contours of the ACA repeal bill that President Obama vetoed in January 2016, would provide large tax cuts to the highest-income households. More than half of the benefits would flow to those with incomes over $1 million in 2025. (CBPP estimates that the highest-income 400 households would receive tax cuts averaging about $7 million annually.) At the same time, eliminating the ACA's premium tax credits would raise taxes on 7 million low- and moderate-income families who use those credits to purchase health insurance.

The Trump tax plan would deliver a $387,000 average tax cut in 2025 for people with incomes over $1 million. Millionaires' after-tax incomes would rise by 14%, dwarfing the gains of low- and middle-income households. People making between $40,000 and $50,000 would receive a tax cut of $500 on average, or just 1% of their after-tax income.

Whether you support or oppose proposed tax-law changes, consider letting your representatives in Washington know. It's good to keep up on tax-law changes regardless, as they affect how much money you get to keep in your pocket.