When the tax day arrives each year, millions of Americans are expected to file their tax return. The filers represent everyone, from the rich to the poor. However, one group pays the bulk of the nation’s tax. So, who pays the most taxes, rich or poor? Continue reading to find out.
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Taxation on the Poor
Taxation can affect the financial well-being of low-income earners. Contrary to the view that low-income earners don’t pay much tax, several other forms of taxes still eat deep into their earnings. Here’s how taxes work for low-income earners.
Income Tax and the Low-Income Bracket
While people with low incomes usually fall within tax brackets with lower rates, income tax still takes a good portion of their earnings. However, deductions and thresholds usually help reduce the burden because most low-income earners often qualify for tax credits or refunds.
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Impact of Sales Tax
Low-income earners spend a larger portion of their income on necessities, such as groceries or clothes. This means that taxed goods and services also eat a large portion of their earnings.
Tax Credits and Benefits
The United States government has many programs to reduce the tax load on low-income earners. Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are two main examples. These programs offer financial relief by giving qualified families and individuals a tax break. Besides tax breaks, they also offer refunds.
But the truth is that these government initiatives aren’t enough to remove the financial struggles of taxation on the poor. While the poor might not contribute much to direct taxes, the impact of indirect taxes affects them significantly. You can get one or two guides from Amazon to learn how to build wealth by permanently lowering tax rates.
Taxation on the Rich
A report from the White House study shows that the wealthiest households in the United States paid an average federal individual tax rate of just 8.2%. However, an average US taxpayer in the same year paid 13%. Here’s how taxes work for high-income earners:
Tax Deductions and Strategies
People who make a lot more money have several ways to cut down their taxes legally. Deductions for charitable donations or mortgage interest are some of the few ways.
In addition to deductions, they can contribute to retirement accounts or even use other strategies to cut down the amount of income subject to tax.
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Investment Taxes and Capital Gains
Many rich people make their money through investments. Taxes on investment income, such as capital gains tax, are usually lower than regular income tax rates. This means that rich people pay a smaller percentage of their total investment income in taxes.
The thing to note here is that while rich people usually pay more in raw dollars because of their higher income. However, deductions and other tax reduction strategies make it possible for rich people not to pay as much as they should in taxes compared to their total earnings.
This clearly shows that rich people pay more in taxes overall. However, the percentage of their earnings that goes into taxes can be lower than what low-income earners pay.
It’s believed that high-income earners pay the most in combined federal, state, and local taxes. However, we shouldn’t forget that their higher earnings mean that even if they pay lower or the same percentage as the poor, it adds up to more money in taxes.
Plus, after accounting for deductions and strategies, rich people are likely to pay a smaller share of their total income in taxes compared to those with lower incomes.
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