Why Rich People Pay Less in Taxes and How You Can Use Their Strategies
Written by
Jake Safane
Edited by
Rebekah Evans
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Billionaire Warren Buffet famously proclaims to pay a lower effective tax rate than his secretary, as he wrote in a New York Times op-ed. He does so by simply taking advantage of IRS rules that enable many wealthy people to minimize taxes, such as how investment income is often taxed at a lower rate than ordinary income, especially by avoiding payroll taxes for Social Security and Medicare.
That’s not to say that being rich automatically means you pay less in taxes and in terms of the total dollar amount, the rich tend to pay significantly more. However, the tax rates many wealthy people pay can be lower than what an average worker pays based on strategic tax planning and how they earn their income.
Some of the below strategies may also be available to you, even if you’re not rich.
Earning More Investment Income Over Wages
Investors like Buffet or executives at large corporations can often lower their effective tax rate by having relatively low salaries and instead earning a lot of money from stock-based compensation, such as dividends or capital gains from selling company stock.
“[Wealthy people] don’t only rely on W-2 income as employees like most middle-class individuals. Their income does not only come from W-2 wages, where you are limited — they also have investment income like dividends and capital gains,” said Armine Alajian, founder and CPA at Alajian Group.
Not all investment income is taxed at favorable rates, but qualified dividends and long-term capital gains are. These rates generally max out at 23.8% and for low- and middle-income earners, rates can be 0% or 15%. Even if you do end up paying the top rate, that’s often lower than regular income tax rates, which max out at 37%. Plus, investment income is not subject to the 7.65% that employees pay for Social Security and Medicare taxes, also called payroll taxes.
So, the more that you can shift your earnings toward investment income rather than regular wages, the more you can potentially lower your effective tax rate. For some, that might mean taking the risk of accepting a job that pays a decent amount of compensation in the form of stock options, rather than salary.
This tax difference can also be a motivator to invest more. Down the road, you might decide to withdraw some of your investment gains if they’re taxed as long-term capital gains, which might leave you with more money for something like a vacation compared with picking up extra shifts at your job.
Timing Income
Timing also matters when it comes to taxes, such as how you might want to lower your income in years when tax rates would be high and vice versa. For example, some tax experts suggest claiming less income in 2025, given that tax rates will potentially drop in 2026 if new tax legislation passes.
For simple math’s sake — not necessarily real-world numbers — suppose you could earn $40,000 in taxable income in 2025 at a 15% average tax rate and $60,000 in 2026 at a 10% rate. That would mean you’d pay $12,000 in taxes on $100,000 in income across two years. Yet if you flipped it around and earned $60,000 this year and $40,000 next, you’d pay $13,000 in taxes — an extra $1,000, even though the total income didn’t change.
Because many wealthy people don’t rely on W-2 income, they have more flexibility to take advantage of these types of situations.
“They have businesses, where they can control their losses and profits,” Alajian said.
For example, a business owner might try to wrap up and bill for a client project at the beginning of January 2026 rather than the end of December 2025, as a small delay could end up making a big tax difference.
Yet this strategy is available to anyone with self-employment income, regardless of wealth. Maybe you give yourself permission to enjoy the December holidays while easing off on your side hustle, while working a little extra the following January, assuming that would result in a tax benefit.
Timing is also part of strategies like tax-loss harvesting, where you sell investments that are down to create a taxable loss, while then buying different investments that will hopefully appreciate in the future. Although you’re generally just delaying taxes in this situation, that typically provides net benefits. With inflation for example, paying $1,000 in taxes this year is essentially more expensive than paying $1,000 five years from now, so deferring taxes can increase your purchasing power.
You don’t have to be rich to tax-loss harvest. Nowadays, several financial apps can automate the process for you or if you do work with a human advisor, they can often guide you.
Year-Round Tax Planning
Lastly, while you might be looking at your tax situation now as the filing deadline looms, it’s too late for many tax maneuvers that could save you money, as most apply to what happened the preceding year. So, instead of just trying to find tax savings during tax season, you might take a page out of the wealthy’s playbook.
“Wealthy people tend to do tax planning throughout the year, in which they project their income and plan around that with different strategies available for their current needs — and this is done constantly throughout the year, every year,” Alajian explained.
In doing so, you might find ways to shift income, qualify for credits and deductions and ultimately set yourself up for a smaller tax bill.
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