Think You Know Who's Wealthy? Tax Data Says Think Again – According To IRS, Only 10% of High Earners Actually Make the Cut

When defining wealth, most people think of big paychecks and high incomes. However, an article published on IRS.gov, "Over the Top: How Tax Returns Show That the Very Rich Are Different from You and Me," reveals some surprising truths about who is truly wealthy. Spoiler: A six-figure salary isn't enough to put you in the same league as the ultrarich.

According to the study, only 10.4% of taxpayers with estate-level wealth – those whose estates exceed the federal filing threshold – end up filing a federal estate tax return (Form 706). This raises a provocative question: Why do so few of the top earners meet the threshold? The answer lies in how the wealthy manage their money.

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High Income ≠ High Wealth

The IRS study highlights that income alone doesn't tell the whole story of wealth. Many individuals in the top AGI (adjusted gross income) brackets don't have enough assets to qualify as wealthy under estate tax rules. In fact, 70-80% of people in the 90th percentile of AGI fall below the estate tax filing threshold.

For instance, among joint filers who passed away between 1996 and 2002, those required to file estate tax returns had AGIs 5-7 times higher than their non-estate-tax counterparts. However, even this impressive income often masked their true economic resources. The wealthy rely on investments and strategic financial planning to build their fortunes, which aren't fully reflected in AGI.

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How the Wealthy Really Make Their Money

Unlike most taxpayers, who rely heavily on wages or pensions, the ultra-wealthy follow different rules. For them, labor income makes up only a fraction of their wealth. Instead, they rely on:

• Capital income like dividends, interest and capital gains.
• Tax-exempt strategies such as municipal bonds.
• Asset management strategies that delay or minimize taxable income.

For example, wealthy single women derived up to 35% of their AGI from taxable interest, compared to less than 20% for other groups. Similarly, joint filers in the wealthiest category often saw significant AGI spikes in the years before death, likely due to asset sales or liquidations designed to maximize wealth transfer.

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So, What Can You Take Away From This?

If there's one lesson here, it's this: wealth-building isn't just about what you earn; it's about how you manage and protect your assets. Tax efficiency and investment choices matter more than a hefty paycheck for growing and preserving wealth.

Want to apply the strategies of the ultra-wealthy to your finances? Consulting a financial advisor who understands tax strategies and wealth-building techniques is a smart first step. They can help you design a plan beyond income and focus on sustainable, long-term financial growth.

Remember, true wealth isn't always visible on a tax return – but with the right strategy, it can be yours to build.

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