Tax Deductions Not Available to the 1%

by iam1percent on March 10, 2012 · 43 comments

There are many tax deductions that phase out depending on your income.  I’m not advocating that the income restrictions be removed, but rather wanted to provide this list to show that U.S. tax laws do not always benefit of the rich.  In fact, for people like me who earn a lot, but have not yet accumulated a significant amount of wealth, these tax laws prohibit me from accumulating wealth as fast as a Warren Buffett or Mitt Romney who can benefit from tax loopholes on their already accumulated wealth.

It’s these deductions and more that allow 47% of Americans to pay a $0.00 federal tax bill.  I think there is an interesting civic philosophy question about whether it’s preferable that 47 percent of the country votes on issues of defense spending, education department policy and other functions of government that are funded by federal income taxes, while they only contribute to excise and payroll taxes.  They also benefit from the programs, roads, bridges, education that is paid for by taxes. 

Current deductions not available to the 1% include (married filing jointly):

  • Earned income tax credit (phaseout end $49,078 with 3 children)
  • Child Tax Credit (phaseout begins $110,000)
  • Child and Dependent Care Credit (phaseout ends $43,000)
  • Adoption Credit (phaseout ends $225,220)
  • American Opportunity Credit (phaseout ends $182,000)
  • Hope Credit (phaseout ends $122,000)
  • Lifetime Learning Credit (phaseout ends $122,000)
  • Education tuition and fees deduction (phaseout ends $160,000)
  • Coverdell Education Savings Account (phaseout ends $220,000)
  • Student Loan Interest Deduction (phaseout ends $150,000)
  • Education Savings Bond Program (phaseout ends $135,100)
  • Savers Credit (phaseout ends $56,500)
  • Roth IRA contribution limits (phaseout ends $179,000)
  • Traditional IRA contribution (phaseout ends $110,000)
  • Deductible IRA contribution (phaseout ends $179,000)
  • Taxation of Social Security benefits (phaseout ends $44,000)
  • Personal Exemption in 2013 (phaseout ends $372,700)

Detailed information on these deductions can be found on the Tax Policy Center website.  I know some may say that there are other tax benefits to the rich that otherwise are not available to anyone else, such as the capital gains tax, but for 1 percenters like my wife and I, we don’t make any money on capital gains.  We go to work on a daily basis, make a fair wage, and pay income taxes like everyone else.  We also can’t take advantage of carried interest like many hedge fund managers.  We also can’t take advantage of accelerated depreciation because we don’t own a company…we work for a company.  Whether everyone has to pay something or we remove certain unfair tax deductions on the rich, the argument doesn’t come down to how to make the tax system fair for the 99%, but how to make it fair and equitable for the 100%.

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{ 41 comments… read them below or add one }

Jonny March 10, 2012 at 2:49 pm

Well researched article Jake :)
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JT March 10, 2012 at 3:21 pm

This is fascinating and greatly appreciated. In doing our taxes this year I thought that the only way for us to pay less taxes was to have kids, but it looks like we are phased out of all of the deductions. (Not that I would have children in hopes of a tax break of course!!).

We are like you in that we both have high paying jobs but aren’t building wealth in the ways that the “loopholes for the rich” apply to.

So glad you blog by the way, this has quickly become one of my favorites!

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iam1percent March 11, 2012 at 4:48 am

JT, thanks for being a regular reader! Only good tax breaks that I use are mortgage interest deduction and charitable contributions…

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Kari@Small Budget Big Dreams March 10, 2012 at 3:51 pm

I’m not part of the 1%, but I’m surprised at how low the threshold is on the Child Tax Credit and Child and Dependent Care Credit. If the bf and I were married with kids we wouldn’t get either.
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iam1percent March 11, 2012 at 4:50 am

Kari, I hear you. The child tax credit doesn’t have a phase out, just a phase in so the deduction just gets smaller as your income grows, but they don’t eliminate the deduction fully. That’s the thing with these credits. If they’re not indexed to inflation, most taxes will hit everyone at some point in the future.

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Six figure investor March 10, 2012 at 8:38 pm

You point out an unfortunate truth that high tax rates hinder new wealth while existing wealth gets a pass. Its a policy of an ignorant populice that equates income with wealth, while real wealth is rarely earn by an income.
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iam1percent March 11, 2012 at 4:51 am

Thanks for your comment…and so true…

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Terry March 10, 2012 at 9:45 pm

I’ve never been one to suggest that the top 1% are overtaxed – I regard effective tax rates on actual discretionary income a good measure of tax fairness – but long ago I noticed and have objected to the phaseout of deductions, most of which start around $100K income.

It’s one thing to have tax brackets with progressive rates, but stealth taxation of this sort is one of my big no-nos. If Congress wants to tax X dollars at a rate of Y, it should do so transparently and not try to sneak in extra taxes by phasing out deductions on top of the higher nominal tax rate.

Similarly, the AMT was originally designed and intended to apply to those in the top 1% of the top 1% – and not even all of those – who were creatively avoiding taxes. Congress should immediately index the AMT to where it would be today if it had been indexed to inflation, thereby eliminating AMT for 99.9 percent of those who currently pay it. But they’ll never do that because it brings in a lot of money they’re unwilling to give up.

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iam1percent March 11, 2012 at 4:54 am

Similarly, the tax on long distance phone calls to pay for the spanish-american war of 1898 was only supposed to affect those rich people who can afford long distance calls…fast forward to 2006 (the year they stopped the tax) and it affected every American.

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so March 10, 2012 at 9:49 pm

Not quite the whole story, of course. The payroll tax stopping @110K for SSI qualifies as a tax break for most of the rich but not super-rich. For me, it offsets a lot of the pain of missing the other deduction limits. Further, some of those deductions are relatively infrequent (adoption? how often does that happen in a person’s life?), or duplicative, or can be worked around (like the Roth IRA backdoor).

Just a few points — I think the deduction limits are pretty fair, though they should all be indexed to inflation.

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iam1percent March 11, 2012 at 4:56 am

Well, payroll tax is not really a tax. I believe you said that SS is solvent and NOT a ponzi scheme so people putting money away in SS now will get that money back with interest when they retire. So to say that SS is a tax is also like saying your 401k or IRA is a tax…its money set aside to collect interest and paid back at a future date.

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so March 12, 2012 at 12:17 pm

SS is an insurance program whose premiums are paid by tax, as the commenter below suggested; it’s not a set-aside in the way a savings account is.

Frankly, I wish I had these deductions, as I get murdered in tax time, but I wouldn’t trade the mortgage interest deduction for having a mortgage…

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Terry March 11, 2012 at 6:18 am

As Social Security was intended as sort of an “insurance” -slash-retirement program, it was designed to give greatest protection and financial return to those earning the lowest wages, with declining protection and return as incomes rise.

On the earnings scale, those at the bottom receive the highest nominal return on the payroll taxes they paid in, and early all of their monthly earnings are paid out in monthly benefits. (I say nominal, because low earners have relatively shorter lifespans than the rest of us, and therefore their actual returns from Social Security are lower – if you live to collect benefits for only say 25 months, your actual return can be lower than a higher earner who collects for say 100 or 200 months.)

The highest earners get the lowest nominal return on what they paid in, and of course when your benefits are maxed out, you probably have enough income to live reasonably comfortably, if not opulently.

With the payout formula the way it is, lifting the payroll tax cap beyond inflation really amounts to another type of stealth tax, because nearly none of the high-end payroll taxes are returned to those paying them. Which suggests it would be easier for Congress to lift the cap completely than to increase the top marginal income tax rate above 40%, and is therefore something to be watching out for.

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Amy K March 22, 2012 at 1:04 pm

Ooh, I am unaware of the Roth IRA Backdoor. Do Tell!

I’ll have to do some Googling, we haven’t put anythign in the IRAs for a few years since we hit the limit.

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iam1percent March 22, 2012 at 1:37 pm

The Roth IRA backdoor may be the income limit that was lifted in 2010 for Roth IRA conversions.
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JoeTaxpayer March 22, 2012 at 3:51 pm

Backdoor for the IRA typically means that if you have income too high to deposit to Roth, you can still deposit to the Traditional IRA, but not take the deduction. You then turn around and convert it to Roth.
So long as you have no pretax IRA already, this would create no tax due. If there is pretax IRA money, it’s prorated to be taxed, e.g. you have $15K pre tax and today deposit $5K. Any conversion contains 75% pretax 25% post tax, and there’s tax due on 75% of what you convert.

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iam1percent March 22, 2012 at 4:11 pm

My understanding is that this “backdoor” option is temporary and not usually available for high income individuals as there is an income limit for conversions.

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JoeTaxpayer March 22, 2012 at 6:29 pm

Current rule is there is no income limit for conversions. The rule is not just for the year, it would need to be eliminated by congress. It has no ‘sunset’ provision I am aware of.

For those with no pretax money, it’s a great way around any income limit for Roth funding.

Leigh March 11, 2012 at 12:15 am

One of the beefs I have with these phase-outs is that your income is somewhat dependent on the cost-of-living of the area you live in. Would I be making six figures two years out of college working in a different city? Quite possibly not. It’s looking more and more likely that I will be able to contribute very little to a Roth IRA directly this year in my _third_ year out of college, even with maxing out my 401(k).

I’m looking forward to hitting the Social Security Tax maximum earlier this year than last year though :)
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iam1percent March 11, 2012 at 4:57 am

I always look forward to hitting the maximum with Social Security and Medicare…nice bump in take home pay.

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Jason March 11, 2012 at 2:50 am

We are in a similar situation where we almost all of those phaseouts. The problem I have with the phaseouts is the marriage penalty. The government penalizes you for being married since the phaseout for married people is not double of what the phaseout for a person filing singly. It doesn’t even seem like some of them are 1/3 higher. If my wife and I would just live together and not be married, we’d be able to get most of the deductions. But since we’re married, we can’t hardly any of them.

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iam1percent March 11, 2012 at 4:58 am

Agreed…such ashame there is a penalty to being married from a tax perspective. The government should promote marriage, not discourage it.

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Money Infant March 11, 2012 at 10:06 am

I am not in the 1% and have had the opportunity to take advantage of some of these credits over the years. I have to say that while the credits are nice I would gladly give them up if my income was over the limits :) Love what you write, but you aren’t getting my sympathy on this one. Oh, and what about expats like myself who are still required to pay tax on their worldwide income even though we receive none of the benefits of taxation?
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iam1percent March 12, 2012 at 11:49 am

I think the question comes down to how much are you willing to give up? The top 1% already give a larger portion of their income in taxes outside of these credits. What percent is “reasonable”?

I agree on the expat tax, though can’t you claim a credit on a portion of foreign income taxes paid?

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Money Infant March 12, 2012 at 11:56 am

I could if I was working and making money here. Actually the first $80k of income made overseas is tax free if I’ve read the IRS rules correctly. Very helpful for company paid expats if they can negotiate to be paid in the local currency. Not so helpful for self employed expats like myself. All of my income is from the U.S.
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MyCanadianFinances March 11, 2012 at 12:41 pm

Wow, this must have taken awhile to research! Love your dedication.
But I agree with Money Infant up top, I would gladly give up any credits to be a top 1% earner.
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PB March 11, 2012 at 2:10 pm

One of the many reasons I’m not looking forward to seeing the final tax bill after the account is done. This is our first year married, and our first year in the 1%–it isn’t going to be pretty.

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Edward Antrobus March 11, 2012 at 5:54 pm

I’ve always thought that the phase-out for the Saver’s Credit is ridiculously low. Aside from the fact that it’s the only deduction that phases out before $100k, $56k is about when you’re starting to make enough money to actually afford to sock any away for retirement.
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liezelsy March 13, 2012 at 3:59 am

Gezzzzzzzzzz that tax makes every citizen life miserable. everything went high in our country when the great senator pass that bill. and now we all suffer on his wonderful corrupt bill.
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MyMoneyDesign March 16, 2012 at 4:45 pm

Very comprehensive list! You may have made me realize that I might be getting close to the 1% mark (by government standards).

I am not doubting the statistic you present, but 47% of Americans paying a $0.00 federal tax bill seems really high. Especially when you consider that median income in America is only around $50K. Where did this number come from?

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iam1percent March 16, 2012 at 7:16 pm

Nonpartisan Tax Policy Center…google “47% income taxes” and you’ll see. Yes, they pay SS and medicare, but in terms of income taxes, they pay $0.

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JoeTaxpayer March 18, 2012 at 3:28 am

Don’t forget the AMT. When one is caught by this, strange things happen. For example, my property tax is significant, let’s just say over $8000/yr. Any potential savings are offset 100% by AMT. In other words, I enter $0 for property tax or $50000, and my tax due for the year is unchanged.

About social security. The benefit is not linear. A 25K earner with get over 50% replaced by SS, at 40K, 44%, $70K, 35%, and $90K 30%. In other words, a $90K earner will have over 3X the withholding as the $25K earner, but just over twice the benefit. Since the payments at retirement are capped, why should any higher earner not have their withholdings capped?
I have a bit of a chip on my shoulder about social security. With over 14% of my income taken each year (let no reader kid himself, the ‘employer deposit’ comes from your pocket) this alone should be enough for retirement. Take even 5 or 6% for insurance, leave me 9%, and if I add just 5% back along with a 401(k) match, I’d be set. Instead, I say goodbye to this 14%, and need to save yet another 15% from my income for retirement. And then the closer I get to the end game, the more I hear that congress is trying to figure out how to confiscate it. A wealth tax? An inheritance tax?
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iam1percent March 18, 2012 at 11:30 pm

Joe, thanks for this insight. I never realized or looked into SS payments in the future and didn’t realize it was capped. You make a very convincing argument that I will use against my liberal friends.

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White Coat Investor April 4, 2012 at 4:43 am

The phase-outs definitely steepen the progressiveness of our tax system. It’s hard to hide very well from the taxman when your income is “top 1%”.
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iam1percent April 4, 2012 at 12:41 pm

I just perused your site…I couldn’t get off it! Its very well written and lots of good information, particurly for my wife and I! Thanks for stopping by!

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http://www.propertytaxappealservice.com/ April 4, 2012 at 8:16 am

i love the look and feel of your post …
thanks for taking the time to put it all together for us…
Tax deduction great article…

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Ann July 9, 2012 at 7:10 am

Wow. I live well and, still, I cry.
There are people doing real work and working several jobs that have not had half the opportunities any of you have had, but don’t whine half as much.

I would be ashamed if I were in your shoes with your money worries and concerns. I would count my blessings for my headstart in life, afforded to me by my parents. Recognizing that you’ve not had to pull yourselves up by your “own” bootstraps would be a start. Saying Thank you to the parents that did all of the sacrificing, so that you wouldn’t have to, would be gracious and humbling.

There are people working that are food insecure and living in their cars and you begrudge them a tax, you don’t qualify to receive.

You all are so busy impressing each other with your money concerns any empathy one might feel for your money concerns is immediately wicked away. What do some of you earn monthly? $10,000-$40,000…more?

This is what the people you envy earn on average: $7.25-$16.00 an hour.
Rents in the innercities begin at: $700.00 a month. Do the math. Still begrudge the earned income credit these people receive? This is why it is difficult for them to change their dynamics. They don’t earn enough or have the breathing room necessary for sacrificing, because there isn’t anything left to sacrifice.

I don’t mean to diminish your contributions, but would any of you give up what you have to experience their existence?

There are those with the mentality of “they should have made better choices”. Oh yeah? When? They came from nothing and for them they’ve made all of the best possible decisions to have what they have. “Well, then they should not have gotten married, possibly added a child, knowing they couldn’t afford it.” They should not live a life, until they could afford to do so. They were not prepared for higher education, can’t afford skill-level job training, because they must work to support themselves or get welfare.

There is a deep shame in the innercities, for most, to receive welfare. I know you were under the assumption that this is the only thing the poor and working poor want. You would be so surprised. Respect is given to those that work. Work. Welfare is for the lazy and grifters.

In New York you are given $68.00 every two weeks, $200.00 in food stamps $600 rent allowance. This is a grand total of $936.00 a month. Annually $11,232 and for all you receive from the government you must work for them 21 hours a week and put in 14 hours of job search and interviews. There isn’t any sitting at home living off of the dole. There is a bonus. They will provide you with a 7 day metro card to travel to your appointments. It is a job being on welfare when you live in the innercities, better to work.

I’m sorry you all are having such difficulties with the inequality in tax deductions. If Mitt wins then it will be your blessing and their burden.

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Ann July 9, 2012 at 7:19 am

There are many instances of editing needed, please forgive me the lack of editing for clarity.

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iam1percent July 9, 2012 at 8:19 am

Many things are painfully obvious from your comment. You haven’t read my post about how I got to the 1 percent, and that you have not read this post in its entirety. Additionally, you have made some choices that you regret, and that somehow you feel entitled to someone’s money.

I don’t begrudge anyone a tax credit. If you noticed the second sentence in my post (in bold, mind you), I state that I don’t advocate lifting the income limits on the tax deduction. The point of the post was to say that the rich are already paying their fair share.

I also don’t agree that “they’ve made all of the best possible decisions to have what they have”. Sure, some did, but some did not. To say that all have made the BEST possible decision is just plain wrong.

I also notice that many people in your camp tend to go to the impoverished, rather than talk about the family who earns $100k and still gets tax credits. I believe in a safety net, but I don’t agree that a safety net should go to people who don’t need it.

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iam1percent March 22, 2012 at 8:23 pm

Joe, do you have a reference from the irs website? My accountant says that it only applied to 2010 amd that they would need to see a reference from the 2012 irs tax laws.

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JoeTaxpayer March 22, 2012 at 8:32 pm

Pub 590 is current for the 2011 return. It references both the fact that in 2010 conversions were allowed to be split over 2 years, 1/2 in 2011 and 1/2 in 2012.
But it also references 2011 conversions, which are not permitted the split, but are taxable in 2011 to the extent they include untaxed value. It’s common knowledge this is good for 2012 as well.
Forgive me, he’s incorrect.

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