It’s perfectly legal for billionaires to pay so little in taxes. Democrats say they could finally change that after the bombshell ProPublica report.

Felipe Castro holds a sign advertising a tax-preparation office for people who still need help completing their taxes before the IRS deadline on April 14, 2010, in Miami.
Felipe Castro holds a sign advertising a tax-preparation office for people who still need help completing their taxes before the IRS deadline on April 14, 2010, in Miami.

  • A ProPublica report based on secret IRS files showed billionaires pay relatively little tax.
  • Inequality experts have been warning for years that the wealthy pay relatively low taxes.
  • The details added impetus to a push by Democrats to ramp up taxes on the country’s highest earners.
  • See more stories on Insider’s business page.

On Tuesday morning, ProPublica published a bombshell report showing how little America’s wealthiest pay in taxes, based on leaked documents from the Internal Revenue Service (IRS).

The report shows in detail how billionaires like Jeff Bezos and Warren Buffett have seen billions added to their net worth with little impact on their tax bill. It’s totally legal, and for many, not all that surprising.

“It’s not surprising at all, I think,” Chuck Collins, who works at the left-leaning Institute for Policy Studies, an organization dedicated to highlighting wealth inequality, told Insider.

Collins recently wrote a book on the ways the ultrawealthy hide their money and avoid taxation. In it, he uses the term “wealth defense industry” for the cottage industry that’s grown around helping the rich hold onto their money.

“It’s going to be very hard for ordinary people to decipher these tax transactions because they’re purposefully complex,” Collins said. “The wealth defense industry, their bread and butter is complexity, and opaqueness.”

Chuck Marr, the director of federal tax policy at the liberal-leaning Center on Budget and Progressive Priorities, said “we’ve been making this case for a long time.” He pointed to a paper from 2019 that outlines many findings similar to those in Tuesday’s report.

Still, it’s one thing to know something is likely happening, and another to see the details laid bare, and the figures involved. For example, ProPublica found that Warren Buffett paid 0.1% in “true tax rate,” which compares how much he paid each year in taxes to how much his wealth grew.

ProPublica’s report could draw widespread attention – and scrutiny – to certain intricacies of the tax code just as President Joe Biden moves to reform taxes to pay for his infrastructure proposals.

Already, Democratic lawmakers are seizing on the public report as a way to kickstart tax reform.

The report “should make it very hard for the Congress to not address it,” Marr said. “I think it really underscores, again, that very wealthy people do not pay tax on much of their income. And so this tax bill is a clear opening to address that.”

Jeff Bezos
Amazon CEO Jeff Bezos, the world’s wealthiest man.

America’s wealthiest make most of their money from assets, not income

As the 2019 CBPP paper lays out, a good amount of the income that the wealthiest bring in isn’t technically income – or at least it’s not taxed that way.

If you work a job where you receive wages in a paycheck, you’re probably familiar with the income tax, which taxes the money you get for going to work. Those wages would be income, and you’d be taxed under the income tax.

But, as both the CBPP and ProPublica note, the wealthiest Americans get most of their wealth from assets like stocks, and therefore pay taxes on capital gains.

As Marr and coauthors Samantha Jacoby and Kathleen Bryant write, capital-gains taxes are “effectively voluntary to a substantial extent: High-wealth filers may accumulate capital gains every year as their investments appreciate, but they don’t owe tax on those gains until – or unless – they ‘realize’ the gain, usually by selling the appreciated asset.”

So if you hold onto your stock assets, you’re not seeing that capital gains rate. Goldman Sachs estimated last month that the wealthiest Americans possessed between $1 trillion to $1.5 trillion in unrealized capital gains at that time. Some argue that those unrealized gains should be taxed, since the wealthiest could be sitting on valuable stocks, making money, and not paying taxes. Meanwhile, researchers at the right-leaning Tax Foundation argue that a progressive consumption tax would be a better way to tax the rich.

ProPublica reported that the ultrawealthy can also borrow hefty sums of money to pay off their bills as they sit on stocks and take in little income. “They’ll borrow money and they’ll use the stock as collateral,” Marr said. That means the wealthy are essentially using these loans as a form of income, but aren’t taxed as such.

As Marr, Jacoby, and Bryant write, “this is often a much cheaper strategy than selling stock and paying capital gains taxes, particularly when interest rates are low.”

Joe Biden
President Joe Biden.

The report could add flame to the fire for tax reform

Even before the ProPublica report, tax debate had been brewing. In particular, a provision called the “step-up basis” had been facing scrutiny.

Let’s say you’ve held onto stock for your whole life, and it’s only grown in value. If you die and leave it to someone else, the stock takes on the value at which the recipient gets it, meaning neither the original owner nor the inheritor are taxed on those gains.

For very wealthy people, Marr said, that “wipes out a lifetime of tax liability.”

Biden wants to do away with the step-up basis and he wants to tax capital gains for those making over $1 million at a rate equivalent to income.

“Broadly speaking, we know that there is more to be done to ensure that corporations, individuals who are at the highest income are paying more of their fair share,” White House Press Secretary Jen Psaki told The Washington Post in response to the ProPublica report. “Hence, it’s in the president’s proposals. His budget and part of how he’s proposing to pay for his ideas will go ahead.”

“The principle here is to equalize the treatment of ordinary income and capital gains, and that is a principle that’s neither new or particularly novel,” Brian Deese, the director of the National Economic Council, said in an April briefing. “In fact, the last president to enact a reform to equalize the treatment of ordinary income and capital gains was President Reagan, who did so while raising capital-gains taxes as part of the 1986 tax reform.”

The White House did not respond to Insider’s request for comment.

There’s been GOP resistance to further alterations to the tax code following their 2017 tax cut, especially any increase in rates. But the new reporting already ramped up the tax debate within Congress on Tuesday.

Sen. Bernie Sanders, who chairs the Senate Budget Committee, told reporters on Capitol Hill, “To the surprise of nobody I know, the rich and powerful aren’t paying their fair share, what else is new?” He urged lawmakers to approve Biden’s tax proposals.

“I do want people to understand the bottom line,” Sen. Ron Wyden, chair of the Senate Finance Committee, told reporters. “What ProPublica is revealing is, again, some of the country’s wealthiest taxpayers [that] profited handsomely during the pandemic are not paying their fair share.”

He said he’s in the process of crafting a proposal to change that. Asked by Insider about the timeline of its introduction, Wyden responded: “I’ll have it ready to go shortly.”

“Often solutions to this are portrayed as radical, but what’s radical is the current situation,” Marr said. “What’s radical is that wealthy people, a lot of their income never gets taxed. That’s radical.”

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Under Biden’s plan, the top 1% of Americans would pay an extra $100,000 in taxes every year

biden amtrak
President Joe Biden and First Lady Jill Biden.

  • Biden wants to increase taxes on the highest-earning Americans to offset his spending plans.
  • His proposed increases would basically only impact the top of 1% of Americans, according to a report.
  • Biden’s tax proposals aren’t final, and his proposed capital gains increase may not go up that much.
  • See more stories on Insider’s business page.

Under President Joe Biden’s proposed tax increases, the top 1% of Americans could soon see their tax bills grow by about $100,000 per year.

A new report from the Institute on Taxation and Economic Policy (ITEP) finds that only the highest-earning Americans would see their taxes change if President Biden’s proposed increases to the income tax rate and capital gains rate pass. That change is concentrated amongst the top 1%, defined as those with an income over $681,600 (their average income is $2,167,700). The bottom 99% of taxpayers would see a 0% tax change, it said.

On average, the highest earners would see an increase of $104,130 in taxes, coming in at around 4.8% of their income. For those making between $276,200 to $681,600 – an average income of $404,100 – the average tax increase would be $20 a year.

Some states will be hit harder than others by tax increases

In a few states, a larger share of the population would feel the impact of proposed tax hikes. The report highlights that in five states – and the District of Columbia – a more than 1% share of the population would feel a hit.

Those are New Jersey, Massachusetts, Connecticut, California, and New York. In Massachusetts and New Jersey, 1.2% of the population would be affected by tax hikes. The wealthiest New York City residents will soon have the highest tax rate in the country regardless, per Insider’s Hillary Hoffower.

Biden’s proposals target the wealthy, but they’re not final

Biden’s latest tax proposals explicitly target the highest-earning Americans to offset the costs of multibillion-dollar investments in childcare, education, and paid leave. He’s also proposed raising the corporate tax rate from 21% to 28% to offset investments in infrastructure like roads and bridges.

Beyond increases, the IRS could also get about $80 billion in funding to ramp up enforcement on the wealthiest taxpayers, as Biden is proposing. A recent study by IRS researchers and academics found that the top 1% of Americans may be hiding billions from the IRS; Biden’s increased IRS funding could raise $700 billion over a decade, which would still leave the wealthy hiding hundreds of billions.

Of course, the package still has a long way to go before becoming law. A Morgan Stanley research note looked at Biden’s proposals versus what they predict as possible, and said the corporate tax rate and rate on capital gains will ultimately come in lower. However, the income tax rate increase and IRS enforcement will likely be as Biden proposes.

“Look, I’m not out to punish anyone. But I will not add to the tax burden of the middle class of this country,” Biden said in a Wednesday speech to the joint session of Congress.

He added: “When you hear someone say that they don’t want to raise taxes on the wealthiest 1% and on corporate America – ask them: whose taxes are you going to raise instead, and whose are you going to cut?”

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Biden is reportedly getting even more serious about taxing the wealthy

joe biden
President Joe Biden participates in a conference phone call with governors affected by a snowstorm in the Midwest and southwest Tuesday, Feb. 16, 2021, in the Oval Office of the White House.

  • Bloomberg reports that Biden is getting more serious about some taxes targeting the rich.
  • The increases come amidst growing economic disparity throughout the pandemic.
  • Capital gains, larger corporations, and high-earners could feel the impact of the hikes under talks.
  • See more stories on Insider’s business page.

President Joe Biden is getting even more serious about raising taxes on the wealthy, according to a new Bloomberg report. It likely won’t look like a “wealth tax,” though.

Biden hasn’t said he’d enact a wealth tax like the one proposed by Sen. Elizabeth Warren, and instead he’s reportedly considering alterations to the tax code that would increase taxes on high earners without creating a brand-new tax that targets wealth.

Biden has already said that Americans making over $400,000 will see a “small to significant” tax increase. High-earning Americans could see their income taxes increase to 39%.

Now, the deputy director of the National Economic Council, David Kamin has told Bloomberg what other tax changes are currently under discussion. One is eliminating the stepped-up basis, something that Treasury Secretary Janet Yellen has already been eyeing.

That measure has to do with inheritance, and how inherited assets are valued for tax purposes. Current law lets assets that have gained value since they were originally acquired be valued at their market price and only taxed on increase from the value at the time of inheritance – not any of the prior gains.

Also under consideration, according to Bloomberg, is increasing the tax rate on capital gains, taxing them at the same rate as the income tax.

Capital gains – profits made from selling assets like stocks – are taxed differently from income once the owner has had the asset for over a year. The rates for those gains are generally lower than the income tax. Throughout his presidency, Donald Trump mostly weighed even more cuts to capital-gains tax rates. Biden’s proposal could bring the rates up to 39% for those making the most money, a far cry from rates that currently come to around 20%. Also, wealthier Americans are exactly the type of people likelier to own assets that can be sold for a capital gain.

Finally, Biden wants to raise taxes on business.

Yellen is working toward creating a global minimum corporate tax rate, under the idea that if the US can convince most other countries to set the corporate tax rate at a certain level, Biden can raise corporate taxes without fear of multinationals leaving the country.

Growing disparity has underscored the push for a tax increase

According to Bloomberg, the “administration’s intentions” have been reinforced by the K-shaped recovery taking place throughout the pandemic in which high-income Americans have seen their jobs and wages grow, while low-income Americans experience the opposite. Biden himself used the term during a 2020 presidential debate.

Throughout the pandemic, low-wage and minority workers have been hit the hardest; those low-wage jobs may also not return post-pandemic, requiring workers to learn new skills and move into different fields. On the whole, workers globally have lost $3.7 trillion in wages during the pandemic, while the world’s billionaires have added $3.9 trillion to their cumulative net worths. In the US alone, billionaires added $1.3 trillion to their net worths during the pandemic.

Biden’s $1.9 trillion stimulus did offer some relief – and increased consumer confidence – for low-income Americans. That package was passed through reconciliation, which seems to be the most likely route forward for any Democratic tax hikes.

Tax increases – and what the wealthy are (or aren’t) paying – have been a hot topic

A new report found that the top 1% of Americans are avoiding taxes more than anticipated; they’ve been failing to report about 21% of their income.

There’s also been a more targeted push by progressives to introduce a new tax on wealth. Warren introduced a new bill that would increase taxes on the top 0.05% of households. If the measure had been in place in 2020, it would have raised $114 billion from billionaires alone.

White House Press Secretary Jen Psaki has said Warren and Biden share similar objectives for addressing that “those at the top are not doing their part,” but the two ultimately have different plans.

In an interview with Bloomberg, Warren praised the American Rescue Plan and Biden’s continual advocacy for it. “There is momentum now for real change, and tax policy is a critical part of that change,” she told Bloomberg.

Warren also recently Sen. Bernie Sanders and other progressive Democrats in introducing a bill that would target corporations where CEOs are at least 50 times more than the median worker. That bill could raise up to $150 billion in 10 years.

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Investment income is taxed in a variety of ways – here’s how to estimate what you’ll owe and tips to minimize it

investment income
Your investment income may be taxed as ordinary income, at certain special rates, or not at all, depending on the type of investment it is and the sort of investment account it’s in.

  • Investment income can be taxed as ordinary income or at special rates, depending on the type it is. 
  • Capital gains and some dividends receive preferential tax rates. Interest and annuity payouts are taxed as ordinary income. 
  • All investments earn income tax-free while they remain in tax-advantaged accounts.
  • Visit Business Insider’s Investing Reference library for more stories.

You probably know that you have to pay taxes on just about all your income. But while the taxes on your work income is fairly straightforward – based on your tax bracket, and often automatically withheld from your paycheck – the tax on investment income can be more complex. 

Not all investment income is taxed equally.

In fact, your investments are taxed at different rates, depending on the type of investment you have. Some investments are tax-exempt, some are taxed at the same rates as your ordinary income, and some benefit from preferential tax rates.

When you owe the tax can also vary. Some taxes are due only when you sell the investment at a profit. Other taxes are due when your investment pays you a distribution. 

And finally, where you hold the investments matters. If the asset is in a tax-deferred account, such as an IRA, 401(k), or 529 plan, you won’t owe taxes on the earnings until you withdraw money from the account – or, depending on the type of account, ever.

See what we mean by complex? Never fear – here’s everything you need to know about the taxes on investment income, and the tax rates on different investments. 

What is investment income?

Investment income comes in four basic forms:

  • Interest income derives from the Interest earned on funds deposited in a savings or money market account, or invested in certificates of deposit, bonds or bond funds. It also applies to interest on loans you make to others.
  • Capital gains. Capital gains come from selling an investment at a profit. When you sell an investment for less than you paid for it, it creates a capital loss, which can offset capital gains.
  • Dividend income. If you own stocks, mutual funds, exchange-traded funds (ETFs), or money market funds, you may receive dividends when the board of directors of the company or fund managers decides to distribute the excess cash on hand to reward their investors.
  • Annuity payments. When you purchase an annuity, a contract with an insurance company, you pay over a lump sum. The insurance company invests your money, and converts it into a series of periodic payments. A portion of these payments can be taxable.

How is investment income taxed?

With so many variables, how can you estimate the tax bite on your investments? Here are the tax rates for different types of investment income.

Interest income

For the most part, interest income is taxed as your ordinary income tax rate – the same rate you pay on your wages or self-employment earnings. Those rates range from 10% to 37%, based on the current (2021) tax brackets. 

Some interest income is tax-exempt, though. Interest from municipal bonds is generally tax-free on your federal return; when you buy muni bonds issued by your own state, the interest is exempt from your state income tax as well.

Another exception is granted US Treasury bonds, bills, and notes, as well as US savings bonds. They are exempt from state and local taxes, though not federal taxes. 

Capital gains

The tax rate you’ll pay on capital gains depends on how long you owned the investment before selling it.

You have a short-term capital gain if you own the asset for one year (365 days) or less before selling it. Short-term capital gains are taxed at the same rate as your ordinary income.

You have a long-term capital gain if you hold on to the investment for more than one year before selling it. Long-term gains are taxed at preferential rates, ranging from 0% to 20%, depending on your total taxable income.

Capital gains are not taxable while the funds remain within a tax-advantaged IRA, 401(k), HSA, or 529 plan.

capital gains

Dividend income

The rate you pay on dividends from stock shares or stock funds depends on whether the dividend is qualified or unqualified. 

Qualified dividends are taxed at the same rates as long-term capital gains. Unqualified dividends are taxed at the same rates as ordinary income.

To count as qualified, you must have owned the dividend-producing investment for more than 60 days during the 121-day period that started 60 days before the security’s ex-dividend date. The ex-dividend date is the date after the dividend’s record date, which is the cut-off date the company uses to determine which shareholders are eligible to receive a declared dividend.

Annuity payments

The taxation of annuity payments is a little more complex. While you may earn interest, dividends, and capital gains within your annuity, you don’t owe any taxes on this income until you actually start receiving your annuity payouts. You only have tax due on the sums you receive each year.

What you owe also depends on whether you purchased the annuity with pre-tax or after-tax dollars. If you purchase an annuity with pre-tax dollars (by rolling over money from your 401(k) or IRA), payments from the annuity are fully taxable.

But if you purchase an annuity with after-tax dollars – that is, you didn’t use retirement account money, you only pay taxes on the earnings portion of your withdrawal. The rest is considered a return of principal (the original lump sum you paid into the annuity). 

 When you receive your 1099-R from your insurance company showing your annuity payouts for the year, it will indicate the total taxable amount of your annuity income.

Whether you pay tax on 100% of the annuity payments or only the earnings portion of your withdrawal, all annuity payments are taxed at the ordinary-income rate.

How do I avoid taxes on investment income?

Most investment income is taxable, but there are a few strategies for avoiding – or at least minimizing – the taxes you pay on investment returns. 

  • Stay in a low tax bracket. Single taxpayers with taxable income of $40,400 or less in 2021 qualify for a 0% tax rate on qualified dividends and capital gains. That income limit doubles for married couples filing jointly. If you can take advantage of tax deductions that will keep your taxable income below that amount, you may be able to avoid paying taxes on a significant portion of your investment income.
  • Hold on to your investments. Hanging on to stocks and other investments can help ensure you take advantage of preferential rates for qualified dividends and long-term capital gains.
  • Invest in tax-advantaged accounts. Interest, dividends, capital gains – almost all forms of investment income are shielded from annual taxes while they remain in one of these accounts. With a traditional IRA or 401(k), the money is only taxable once you withdraw funds from the account. Money earned in a Roth IRA is never taxable, as long as you meet the withdrawal requirements. Interest income from a health savings account (HSA) or 529 plan is not taxable as long as you use the money to pay for qualified medical or educational expenses, respectively.
  • Harvest tax losses. Tax loss harvesting involves selling investments that are down in order to offset gains from other investments. If you have investments in your portfolio that have poor prospects for future growth, it could be worth it to sell them at a loss in order to lower your overall capital gains. Many robo-advisors and financial advisors will take care of harvesting for you, trying to net out the winners and the losers.

The financial takeaway

A few tax-exempt assets aside, investment income is taxable. And it’s taxed in two basic ways: at ordinary income rates or at a lower preferential rate, generally known as the capital gains rate.

All assets accrue income tax-free while they remain in tax-advantaged accounts.

While it’s never a good idea to make investment decisions based solely on the tax implications, it is wise to consider the tax consequences of any investment moves you make. Taxes might not be the only reason you choose one investment over another, but tax breaks can be a bonus on any well-thought-out investment strategy.

Related Coverage in Investing:

Dividends are taxed in different ways – here’s how to figure what you owe on your stocks’ payouts

Interest income from your investments is taxable – here’s how to calculate what you owe and ways to lower it

Bitcoin taxes: Understanding the rules and how to report cryptocurrency on your return

Capital gains are the profits you make from selling your investments, and they can be taxed at lower rates

A variable annuity can provide you with more retirement income since its payouts rise with the stock market

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