Billionaire Warren Buffet claims he pays a lower tax rate than his secretary. He does this by taking advantage of IRS rules that allow many wealthy people to minimize taxes. Investment income is often taxed at lower rates than ordinary income.
It is also not subject to payroll taxes for Social Security and Medicare. However, being rich does not automatically mean paying less in taxes in total dollar amounts. The rich tend to pay much more in absolute terms.
However, the tax rates many wealthy people pay can be lower than those of an average worker. This is due to strategic tax planning and how they earn their income. “[Wealthy people] don’t rely solely on W-2 income as most middle-class individuals do.
Their income comes from wages and investments like dividends and capital gains,” said Armine Alajian, founder and CPA. Not all investment income is taxed favorably, but qualified dividends and long-term capital gains are generally, with rates maxing out at 23.8%.
Rates can be 0% or 15% for low—and middle-income earners. Investment income isn’t subject to the 7.65% payroll taxes that employees pay.
Wealthy investors’ tax planning tips
Shifting earnings toward investment income rather than regular wages can lower your effective tax rate. For some, this might mean accepting a job that pays with stock options rather than salary. It could motivate them to invest more.
Timing is crucial for taxes. This means lowering income during high-tax rate years and earning more in low-tax rate years. For example, some suggest claiming less income in 2025 if tax rates are expected to decrease in 2026.
Wealthy people often don’t rely on W-2 income, which gives them flexibility. For example, business owners might complete a project in January 2026 instead of December 2025 to take advantage of changing tax laws. This strategy is also available to those with self-employment income.
While many look at their tax situation only during tax season, many wealthy people plan throughout the year. “Wealthy people tend to do tax planning year-round, projecting their income and planning around it with different strategies,” Alajian explained. By planning year-round, you might find ways to shift income and qualify for deductions.
This can ultimately reduce your tax bill. Understanding and applying some of the wealthy’s tax strategies can benefit everyone. From shifting income types to timing earnings and conducting year-round tax planning, these tactics can result in a more favorable tax situation.
Image Credits: Photo by Kelly Sikkema on Unsplash
