By now, even if you waited until the last minute to file your 2020 taxes, you’ve likely received your tax refund. And if you’ve been paying attention to the news lately, you’re probably also aware that if you paid any taxes at all, you probably paid more in taxes than many of America’s wealthiest people.
A ProPublica report analyzing IRS data published in early June revealed that Forbes’ 25 richest Americans paid a total of $13.6 billion in federal income taxes from 2014 to 2018, despite their net worth growing by more than $400 billion over that span. That’s a true tax rate of a mere 3.4%.
The Richie Riches has taken advantage of a tax system designed to supposedly have everyone pay their fair share with a streamlined procedure. But that’s just not the reality.
Instead, the median American household earned roughly $70,000 a year but paid about 14% in annual federal taxes in recent years. Meanwhile, there were years when Jeff Bezos, Elon Musk, Michael Bloomberg, Carl Icahn, and George Soros completely avoided paying federal income taxes because gains on assets like stock and property aren’t considered taxable income until sold.
Jeff Bezos isn’t a hero for setting his annual salary around $80,000 a year to be on par with middle-class earners because wages are taxed at a higher rate than investments.
How to pay less income tax
Overpaying in taxes is like a punch in the gut. If you weren’t happy with your refund from this year, it’s never too early to start planning for filing your 2021 tax return.
You probably don’t have the ability to dodge the taxman the way billionaires do—unless you can get by without your job, in which case… why are you even working? But you might be able to take some legal actions to pay less in income taxes.
- Contribute to a 401(k) or other retirement plans
- File for business deductions from freelance gigs or a side hustle
- Take a home office deduction
- File for a higher education credit
- If you don’t pay federal income taxes, see if you qualify for the earned income tax credit
- Itemize your deductions
- Donate stock to avoid capital gains tax
Saving on taxes can help you pay down debt
If you got a sizeable refund this year, you might be eager to put it toward a vacation or concert tickets after the brutal 15 months of coronavirus-related restrictions that have now been lifted in many states across the U.S. But putting your tax refund toward debt repayment can be its own form of self-care.
For those starting from scratch, the first step toward paying down your debt is creating a repayment plan. The debt snowball, debt avalanche, and hybrid methods are popular approaches to working toward a debt-free lifestyle.
With the debt snowball method, you put as much as possible toward your smallest balance while paying the minimum on your other balances. Once you pay off the smallest balance, you put the money you were using for that toward the next smallest balance and continue the cycle until you’ve wiped out your debt. This repayment plan allows you to gain momentum from small victories along the way.
The debt avalanche method is a similar concept, but instead of prioritizing the smallest balance, you prioritize the balance with the highest interest rate and work toward the balance with the lowest interest rate. With the debt avalanche approach, you can save money on interest in the long run.
Whatever you do, just don’t end up like Al Capone.
Sources:
ProPublica
Casey Musarra
Casey is a reformed sports journalist tackling a new game of financial services writing. Mike Francesa once called her a “great girl.”
