Only 1% of the population controls over 40% of the country’s wealth. It might come as a shock only for those living under a rock this whole time.
The 1% do a great job of hiding their wealth from the government. Luckily for them, the US taxing system offers enough loopholes for the wealthy to pay less tax than me and you.
This leads to tax revenue losses of $70 to $100 billion each year. Tax avoidance equals less money for education, health care, law enforcement, and infrastructure.
There’s an age-old saying that the poor pay more. The rich are getting richer faster while the poor struggle to make ends meet. It’s popularly known that Warren Buffet, for example, shared that he pays less taxes than his secretary.
What’s unclear to me- is tax avoidance blatantly lying to the government?
Millionaires don’t pay taxes because taxes are mostly based on income, not wealth. If a person has no taxable income, he’ll pay no income tax even if he’s worth millions of dollars. Millionaires also invest any profit they make back into their businesses, so they don’t owe anything to the government. A regular person can be making $50 000 a year in salaries, have no other assets, and still end up with a higher tax bill.
Millionaires Enjoy Lower Taxes Than Laborers
The richest didn’t build their wealth by earning a big salary. Jeff Bezos, the world’s richest person, reportedly earns a salary of $81 840.
The wealthy made their millions by investing in companies, real estate, stock, and even art. These investments generate capital gains.
Capital income has a lower tax rate than labor income. The current tax rate on income from investments is 23.8%, while income from work is taxed 43.4%.
Since the wealthy’s highest income comes from investments, they pay lower taxes than the average American teacher.
Ways Millionaires Avoid Capital Gains Tax
The capital gains tax structure is set to award long-term investments – something the average person can’t afford. Millionaires predominantly practice 2 schemes to avoid capital gains tax.
Benefiting From Long-Term Capital Gains
When selling a valuable asset owned for less than a year, the capital gain is taxed at the regular tax rate.
If the assets are held for longer than one year, there’s a lower statutory tax rate, ranging from 0% to 20%.
In 2021 a single person with an income of over $445 850 will pay 20% tax on a long-term capital gain. Under the current law, assets that yield a capital gain through appreciation have deferred tax liability until the profits are realized by selling.
Taking Investment Bank Loans
The rich dodge capital gains tax by borrowing from an investment bank and using currently owned assets as collateral.
If they would sell an asset and use the money for an investment, they’d trigger capital gains tax. By borrowing, they can repay the loan with cash gained from the investment or eventually hand over their assets with no capital gains tax.
Philanthropy Is Millionaire’s Shortcut To Avoiding Taxes
Millionaires sharing their wealth with the less privileged is more than a PR stunt. It’s the most popular way to avoid taxes.
When regular people give money to a charity, they have no control of when and where it goes and who’s the end recipient.
Philanthropy has always been the most talked-about loophole. Everyone knows you don’t pay taxes on the income you donate, but the big fish take it a step further.
Millionaires have created the donor-advised funds, a tool to help them avoid taxes for years to come. The DAF allows the wealthy to give assets, whether it’s money, stock, or art, to a sponsoring organization.
The organization then makes donations to those in need but only when the donor approves.
Simply put, the donor enjoys instant tax benefits on the capital gains he gives to the Donor Advised Fund. Still, the money can sit there for years or indefinitely and those in need might never get a donation.
How Millionaires Evade Estate Tax
The current estate tax exemption is $11.18 million per person. Every dollar above that is taxed at a 40% rate.
No worries, millionaires made sure their money is safe from taxes even after their death!
Wealth is transferred to the next generation with almost no estate or gift tax by setting up GRAT funds.
A GRAT- grantor retained annuity trust is a trust fund that invests the inheritance, and any income earned beyond the interest is free of estate and income taxes.
While there can be some income tax over the years, there isn’t any gift tax once the inheritance is transferred to the beneficiaries.
Estate Tax is also known as “voluntary tax” as it’s the most commonly avoided tax.
Tax Havens Are Millionaires’ Safe Point
Tax Havens come right behind charity donations as the most popular tax avoidance tools.
A tax haven is any country that offers no tax liability for individuals and businesses.
Most popular tax havens are The British Virgin Islands, Panama, Belize, Bahamas, and the Cayman Islands. They require an annual business license at a 0% tax rate and provide business people with financial privacy.
Many celebrities and politicians like Madonna, Mitt Romney, Martha Stewart, and Shakira have used tax havens, as was shown in the leaked Panama and Paradise Papers.
The Cayman Islands are home to 85 000 registered companies- more than the people living there!
Creating Shell Companies For Maximum Tax Avoidance
A shell company is a business that exists only on paper with no employees, assets, or operations. This type of company doesn’t provide services or products and doesn’t make any money.
These companies are created in tax havens with the primary goal to manage other entities’ finances, funnel money through it, or provide anonymity.
It doesn’t necessarily mean that it’s something illegal.
Millionaires use shell companies to avoid taxes mainly by buying and selling through them. This way, they’re not required to report international operations.
The shell company is a tax avoidance vehicle for a millionaire’s legitimate business.
Incorporating To Escape Income Tax
Incorporating as a tax avoidance method is the most popular loophole among celebrities and politicians.
The main reason is that labor income is taxed at a higher rate than capital income.
As an individual, higher income means higher taxes, but there are many ways to go around as a corporation.
Through incorporation, individuals can pay themselves a smaller wage and reduce income tax. They can claim different incomes as a capital gain instead of labor income.
How Much Do Millionaires Save By Avoiding Taxes
After the Tax Cuts and Jobs Act, the richest enjoy a heaping tax cuts amount. This law brought the effective federal tax rate down from 35% to 21%.
But millionaires paid even less than that.
In 2018 Amazon paid -2.1%, and Netflix paid -2.5%, which means they received a refund from the IRS.
Apple paid 16.9%, and Facebook comes close with 20.3% federal tax paid.
Millionaires Use Experts’ Help To Avoid Taxes
It’s overwhelming to try and learn every trick in the book even for millionaires.
While money can’t buy you everything, they can pay for an expert team of tax advisors.
The wealthy use certified public accountants that help them stay on top of new tax laws and implement any (semi)legal tax deduction.
Millionaires rely on money experts and people willing to go the extra mile (sometimes literally, to the Bahamas or Belize!).
FAQ
- How can I avoid paying high taxes?
Don’t sell your assets too soon, max out your IRA or 401K, and give to charity in high-income periods. - How much do millionaires give to charity?
A tiny percent of their wealth. Last year Warren Buffet gave 3.85%, Mark Zuckerberg gave 0.3% and Bill Gates gave 4.9%. - How much does Jeff Bezos pay in personal taxes?
Bezos has not disclosed his taxes, but experts say he should pay between $6 billion and $9 billion a year. - How much does Elon Musk pay in taxes?
No one knows. Musk doesn’t receive a paycheck or bonuses. He has a compensation plan with Tesla, in which the company needs to fulfill the goals for him to receive a massive $700 million pay – in stock. - Who pays the most taxes in the world?
The Netherlands holds the first spot in the highest income tax rate at 52%. - What are the best tax-free investments?
Best tax-free investments for the regular person include:
Life insurance, traditional or Roth IRA, 401K, 529 Education Fund, Municipal Bonds, Health Savings Account, Tax-Free Exchange Traded Funds (ETF).
Takeaway
Regular people work for money; millionaires make money work for them.
The more money you make, the more taxes you own, but not if you’re among the wealthiest 1%. The more you have, the easier it is to double that.
We’ve heard many inspiring stories of millionaires who started from the very bottom, with great ideas and business sense.
Somewhere down the road, they forgot where they came from and avoided giving back to the community.
Avoiding taxes is not without consequences. The government’s budget for basics like schools, police, and hospitals is lower since less money is coming in than predicted.
While all of the options millionaires use are legal, they are not ethical.
