Skip Ad Ad Loading... x Embed x Share Our tax system favors the ultra-rich with a high net worth who aren’t earning their income as a salary. Anyone who makes money via investing probably pays a much lower tax rate than a middle-class American who works 40 hours a week. USA TODAY

Donald Trump stumps in Abingdon, Va., on Aug. 10. (Photo: Evan Vucci, AP)

With all the pontificating going on about Donald Trump's “loss carryforward” and whether he's paid any income taxes lately, there's one simple fact that's worth acknowledging: Anyone who makes money via investing probably pays a much lower tax rate than a middle-class American who works 40 hours a week.

That’s not politicking but simple math, said Joe Heider, president at Cirrus Wealth Management in Cleveland.

“If it’s actually earning income through a salary or the management of a business, it’s very difficult to escape taxation,” Heider said. “Our tax system favors the ultra-rich with a high net worth who aren’t earning their income as a salary.”

The way that the wealthy get this favoritism is because their investment returns are subject to capital gains taxes instead of ordinary income taxes.

Consider that wages are taxed at a marginal tax rate of 25% for single filers making $37,651 to $91,150 annually, and married couples making between $75,301 and $151,900 annually. These figures seem very much the definition of “middle class,” given that median household income in America is $53,657 according to 2015 numbers.

Above those ranges, wages face rates of 28% up to 39.6% for the highest salaries.

However, investment returns get much more favorable tax treatment if you have held an asset for more than 365 days. The maximum capital gains tax rate is just 20%, even if you make billions on your investments.

Now, there is plenty of fine print here. For starters, our marginal tax structure means that you pay different rates on each tier of income. Also, there are plenty of juicy deductions for middle-class earners such as child care and mortgage interest provisions. And, of course, there is a 3.8% “surtax” on capital gains for high earners that was enacted as a way to defray some of the costs associated with the Affordable Care Act, so that max rate of 20% actually becomes 23.8% for the highest earners.

But the bottom line is this: Even if you add in the surtax and allow for generous deductions, at best someone making $10 billion in investment profits pays roughly the same effective tax rate as a middle-class family. And it’s all because capital gains taxes have a lower ceiling than ordinary income taxes.

It’s up to the pundits, voters and politicians to make a moral judgment on that fact. But numbers are numbers.

It’s also worth noting that leveling the playing field on tax rates is hardly an issue that only affects conservatives. In fact, as USA TODAY pointed out in 2012, President Obama boasted an effective tax rate of just 20.5% despite adjusted gross income of almost $790,000 for 2011.

At the time, however, Obama was quick to suggest that the rate was unacceptable and that Congress should enact a minimum tax rate of 30% on income regardless of other loopholes and breaks.

The current issue of Trump’s taxes muddies this issue, because investment losses also allow taxpayers to offset any future income. So if it is true that Trump recorded hundreds of millions in personal losses thanks to business deals gone bad, he was able to offset any income equal to that amount for many years to come.

But the real issue comes back to how investment income is treated differently, both in the way it’s taxed and the way the wealthy can use their portfolios to achieve massive tax breaks that middle-class Americans simply don’t have access to.

“There are a lot of ways the ultra-high net worth can escape taxation through the effective management of their tax portfolios,” Heider said, and carrying forward losses is simply the method getting the most attention right now.

Other Big Tax Breaks for the 1%

Earning income via investments isn’t the only way to stiff the tax man. A few other creative loopholes for the rich include:

Charitable donations. If you write a check to the charity of your choice for $100,000, you get to deduct that amount in full from your taxes.

Airplanes. Use your private jet to get around on business? Then you can depreciate that big-ticket asset to reduce your taxable income even as you sip champagne at 10,000 feet.

Donate a whole house. It sounds crazy, but rich folks can donate houses the way other drop their old suits off at Goodwill. “We have worked with several clients who have waterfront property who have the homes physically removed and donated the house to Habitat for Humanity. They then built the house they wanted on the property and were able to take a deduction on the donation of the house,” said Joe Heider, president at Cirrus Wealth Management in Cleveland.

Jeff Reeves is the executive editor of InvestorPlace.com.

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