High-income earners use similar strategies that middle-income earners use to lower their taxable income. The only difference is that the numbers are bigger for high-income earners. They both take advantage of the home mortgage interest deduction, tax-advantaged retirement savings accounts, charitable donations, and other tax-reducing programs to lower their taxes. The distinction needs to be made between high income earners who are business owners and investors as opposed to those who are considered employees.
Business owners have access to strategies to lower their taxable income that employees do not. For instance, tangible property like buildings, vehicles, and equipment, and intangible property like copyrights, patents, and computer software depreciate over time due to deterioration and obsolescence. Business owners are given an annual depreciation allowance that is tax deductible. To qualify for this allowance, the business owner must own the tangible or intangible property, and they must use this property as part of an income-producing endeavor. The property cannot be used and disposed of within one year, and if the property is used for business and personal reasons, only the depreciation from business usage can be deducted from taxes.
Paying lower taxes through the sale of an investment isn’t exclusive to high-income earners because there are many middle-income earners who receive an income through stocks, bonds, and real estate investments. Yet, a larger percentage of high-income earners receive most or all their income through capital gains than middle-income earners. Taxing capital gains is a highly political issue because many people feel that those who take a risk by making investments that help to grow the economy should be rewarded with paying lower capital gains taxes. Other see capital gains as a rich source of government revenue and should be taxed at a higher rate. In any case, people who receive all their income through capital gains can expect to pay 30% to 50% less in taxes than if they were to receive an income from regular employment.
Travel and entertainment tax deductions
Business owners can deduct up to 50% of business-related travel, dining, and entertainment expenses from their taxes. If a business owner takes a person out to breakfast, lunch, or dinner, there is a good chance the business owner will pay for the meal so they can write the expense off on their taxes. If they attend a ball game or concert with a client, that is also an expense that can be written off. The mileage that it takes to go to business-related events is tax deductible up to 54 cents per mile. There are plenty more tax benefits available to business owners and investors, and it doesn’t matter if they are high or middle income earners.