While no aspect of the tax code was designed specifically to provide tax deductions to only the rich, many common tax deductions benefit wealthy taxpayers more than those with lower incomes. Additionally, as the stakes are higher and they have the money to hire skilled tax professionals, high income taxpayers are most able to take advantage of available deductions.
Higher Tax Brackets Mean Bigger Deductions
Notwithstanding which particular deductions they are able to use, wealthy individuals can save more money on tax deductions than those with less income. This is in part simply because wealthy people have more income against which to make deductions: a deduction worth 30 percent is far more valuable on a $200,000 expenditure than on a $20,000 one. Additionally, high-income taxpayers pay higher marginal tax rates, which lead to a greater percentage savings for each deduction. A $1,000 deduction will allow a taxpayer at the 28 percent marginal rate to save $280, while a high-income taxpayer at the 35 percent marginal rate will save $350.
Many high-income individuals own their own businesses, and those individuals can avail themselves of a wide variety of business deductions. These deductions are sometime for simple business expenses such as employees salaries and computers, but also can include spacious home offices, company cars and sports tickets used to entertain clients. While these deductions also are available to lower-income individuals who own businesses, some are certainly more feasible for those with higher business and personal incomes.
Contributions to nonprofits and charities are tax deductible, and the benefits of such contributions necessarily accrue to those with high levels of income and disposable wealth. In fact, higher-income individuals may be able to more easily have a direct individual impact, making contributions seem more valuable. For example, someone with a high income and desire for a significant deduction could give money to a school with the understanding that such a donation will increase her child's chance of being admitted. Similarly, one giving a large contribution to a museum may expect the museum to show its appreciation with a board seat.
Home Mortgage Interest
Homeowners can usually deduct the interest they pay on their home mortgages. Limits on this deduction depend on several factors, but in many cases homeowners can deduct interest on $1 million of loans used to buy or refinance a home. Thus to fully maximize the home mortgage interest deduction, an individual needs to have the income or wealth to purchase a relatively expensive home. Additionally, mortgage interest for a second home also is deductible, and second homes are most likely to be owned by higher-income individuals.