Why wealthy celebrities pay lower tax rates in California

Wealthy Californians have for a long time taken advantage of a range of tax loopholes that lower tax liability. For example, celebrities like Kim Kardashian, who recently made headlines for paying fewer state taxes in California than many people expected, almost certainly has a savvy tax consultant who helps ensure that she pays a lower tax rate each year.

An advocacy group called Courage Campaign recently drew attention to Kardashian's California tax return. The TV star apparently earned $12 million in 2010, but her state income taxes amounted to only one percentage point more than a person who would have had an annual income of $47,000. In other words, Kardashian paid 10.3 percent, while a 5-figure earner would have paid 9.3 percent.

Of course, Kardashian paid a greater dollar amount in taxes, but she and other wealthy Californians can find legal loopholes that allow for a lower tax percentage compared to other taxpayers. Those loopholes include capital gains, charitable contributions, deferred compensation and offshore accounts.

For example, a capital gains tax can be a serious liability for an individual who pays both a standard income tax and a capital gains tax, but people -- Warren Buffett, for instance -- whose earnings are based almost entirely on investments, don't legally have a taxable income. That means they can take advantage of a 15-percent income tax rate, while other taxpayers are subject to at least a 40 percent rate.

In addition, philanthropic contributions can offer sizeable tax breaks if an individual gives away cash, property or appreciated stock. Making such a donation is essentially a loss against investment gains and allows taxpayers to avoid paying capital gains taxes.

California taxpayers who have questions regarding capital gains, charitable contributions, deferred compensation, offshore accounts or generally minimizing tax payments may want to consult a legal professional who focuses on tax law. A tax attorney can help you with full compliance with current tax laws, as well as defend tax shelters, claimed exemptions and other aspects of your return that may come under scrutiny during an audit.

Source: gobankingrates.com, "Is Kim Kardashian Really Guilty of Tax Evasion?," Stacey Bumpus, Feb. 2, 2012

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