One-Percenters Keep Shopping at the Dollar Store

That Mercedes in the dollar-store parking lot isn’t an illusion.

High-earners joined the rest of the country in flooding discount retailers such as Dollar General, Aldi grocery store and Five Below as prices for food and staples rose. Now, with inflation at half its peak, they aren’t letting up.

InMarket, which tracks retailer foot traffic, measured a 4% average increase in the share of dollar-store visits this year among those making more than $100,000, compared with the second half of 2022. Households with six-figure incomes are 15% more likely to say they would shop at dollar stores than they were last June, going from 39% to 45%, according to daily surveys from Morning Consult of about 50,000 Americans.

Wealthy Americans long viewed discount stores as “not for them,” says Michael Liersch, who consults with high-net-worth individuals as head of advice and planning at Wells Fargo. Yet paying $8 for a carton of eggs struck even many affluent people as ridiculous.

Overspending on things was once fashionable for some, Liersch says. “These days, it’s about making the most of your money and not getting ripped off.”

No matter how much you make, consumers say, there is no longer a stigma in going after a good deal.

Cheap kombucha

Autry Liggett, who works in operations for a Santa Barbara, Calif., hedge fund, exclusively shopped at Whole Foods and other high-end chains for groceries and household goods until recently. Growing up, he says he looked down on what he saw as poor-quality products at discount retailers.

Then, one of his friends brought over a case of 99-cent-store kombucha and probiotic drinks a few months ago. “She makes good money, so I just assumed she also shopped at Whole Foods and the other places I shop,” he says. “I was shocked.”

He now pops into the 99 Cents Only store downtown at least once a week, making sure to visit on Tuesday or Thursday, when they restock, for the best selection. He recently bought vitamins that retail at Whole Foods for $25 for $1.99, and a pint of organic blueberries for 99 cents.

A Dollar General spokeswoman says the brand has attracted and retained higher-income customers lately. A recently updated fresh-produce section, now available in nearly 3,900 stores, might be bringing more customers in.

Plenty of wealthy people point out that they got that way partly by not overspending on the small stuff—especially when it is all the same stuff.

“A carrot is a carrot is a carrot,” says Morgan Pierce, who earns about $200,000 a year working at McDonald’s Chicago corporate office. She frequently hits up Aldi and her local dollar store for groceries and other staples. Her last birthday party featured a private chef—and $1 plates and decorations.

Pierce, who was quick to tell her guests where many of the party supplies came from, says people were impressed. It is a shift from how she felt as a child, when she questioned why her family always had to hunt for sales. Now, she says she realises her mom has always been a bargain hound.

“Not everything on the shelves is well-made, but there are things that are, and I am not ashamed to go into those places and get them, and I’m not afraid to tell people about it,” Pierce says.

Bob Gillman, an executive transition consultant, has shopped at Aldi and other discount chains for decades. He didn’t mention the habit to his friends until recently, when a branch popped up near his tony Palm Springs, Calif., community.

“We see lots of people driving Porsches, Mercedes and BMWs in the parking lot,” Gillman says. “No matter how much you make, you don’t want to spend $4 on an avocado when you can get one for 59 cents.”

Few seem to mind feeding a quarter to check out a shopping cart, or bagging their own groceries, Gillman says.

Gillman’s daughter, Rachel Gillman Rischall, often rolled her eyes at her dad’s zealous discount shopping. That is, until this past year, when her grocery bills soared, and birthday-party gifts for her kids’ friends topped $50 a pop near her Chicago home. Fed up, she checked out the toy selection at Five Below and hasn’t looked back. She also now buys journals, art supplies, stationery and snacks there.

“My dad is so proud,” she says.

Shopping at dollar stores is a choice for some, yet it is a necessity for many, and Americans increasingly get their groceries from these retailers.

Expanding into more-prosperous areas is part of Aldi’s strategy, analysts say. The retailer plans to add 120 new U.S. stores in 2023, after opening and remodelling 139 stores last year. The brand says it attracted 9.4 million new U.S. customers in 2022.

Budget influence

Social media is also helping make dollar and discount stores cool. Videos tagged #dollartree have a combined 7.6 billion views on TikTok. Many feature influencers trying out what are known as dupes of popular high-end beauty products and other goods.

Entrepreneur Bethenny Frankel says her discount and drugstore hauls have attracted more attention than anything she did when she was featured on the reality show “The Real Housewives of New York City.”

“I go in there with my Hermès bag,” says Frankel, whose YouTube and TikTok videos shopping at dollar stores and unboxing ultra cheap products regularly ring up millions of views. She says she isn’t paid by any of the discount chains for her videos.

While some viewers have accused her of pretending to like and use a $1 lip gloss or storage bin when she could easily afford its more expensive counterpart, Frankel says her enthusiasm is genuine.

“What’s the difference between a dollar-store and a $20 pair of flip flops? Is there such a thing as truffle-oil-infused rubber?” she says. Lip gloss, meanwhile, “stays on for five minutes no matter how much you spend.”

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.