Georgia residents likely know that the United States has what is known as a progressive tax system. This means that wealthy individuals are required to pay a higher rate of income tax than those who are less fortunate, but this is offset by a number of exemptions and exclusions that reduce the amount of taxes paid by the rich. Politicians sometimes call for a return to top income tax rates of 70 percent or more, but many of the nation’s wealthiest individuals pay no income tax at all.
The biggest source of income for most successful entrepreneurs are the profits generated by their companies, but most of this money is received in the form of dividends. Top executives and business owners may pay income tax on their salaries at rates as high as 39.6 percent, but some dividend income is taxed at the rate of 20 percent. This means that only the poorest of Americans pay a lower tax rate than those who live on investment income.
Wealthy Americans also have advantages when it comes to Social Security contributions and estate taxes. The 6.2 percent withholding tax that funds Social Security ceases once a taxpayer reaches a certain threshold, and falling rates and higher exclusions have taken the sting out of what some politicians call the death tax. Estate tax rates are now 40 percent, and married couples are able to exclude nearly $11 million under the 2016 exclusion.
Attorneys with experience in this area may urge their clients to consider estate tax implications even if the value of their assets seem to be well within the established limits. The Federal estate tax exclusion is tied to the annual rate of inflation, but the prices of assets like real estate can surge quickly.