How Millionaires Avoid Taxes – Being a millionaire is the dream of a lot of people, but didn’t it ever worry you that millionaires pay almost no taxes? Even though you realise that the government needs money to help a lot of people who need a lot of help, it’s hard to be angry at millionaires when they do something that allows them to get the most out of life – pay little or no taxes. If you have always wondered how millionaires have been so able to avoid paying massive amounts in taxes over the years, this article will reveal lots about millionaires and their strategies.
Here’s a good one. Jeff Bezos, Michael Bloomberg, Warren Buffett and Elon Musk all walk into the IRS. But none of them, in various years, seem to have paid federal income taxes. Or how about this one: The rich get richer … because they don’t always pay their fair share into the community chest.
This is US tax law. And now we have a map of how the wealthiest people exploit it thanks to a bombshell report from ProPublica, the investigative journalism nonprofit, which claims to have obtained years of tax returns for the wealthiest people in the country from an anonymous source.
Its first report (it promises more to come) is on the richest of the rich, who in certain years claim losses that can wipe out their income tax bills. This should sound familiar; former President Donald Trump did the same thing.
But that doesn’t mean it shouldn’t be a scandal that Bezos, the richest person on Earth — who has used his vast wealth to start a spaceship company that will take him into space, where he will also be the richest person — has in multiple recent years told the federal government he owed no income taxes, according to ProPublica.
ProPublica also reports that Musk, the second wealthiest human on Earth, whose wealth has grown many billions in recent years and who also has a passion project space company, told the government he owed no income tax in 2018.
The scandal is that these actions are perfectly legal. Bloomberg and Buffett, who have both supported raising tax rates for the wealthy, have both had $0 income tax bills. (Buffett, at least, has long acknowledged this, infamously saying he paid a lower tax rate than his secretary.)Bloomberg, during his run for the 2020 Democratic presidential nomination, tangled with Sen. Elizabeth Warren of Massachusetts over whether the government should tax extreme wealth in addition to income.
How is this possible? The report analyzes how this is possible, and the reasons are many. First, US tax law is focused on income and much of the superwealth is tied up in company stock or other investments that have real value but aren’t taxable year to year.
Wealth vs. income. ProPublica cites guesstimates from Forbes, but it’s an imperfect assessment. It lists Bezos as gaining $99 billion in wealth between 2014 and 2018. But his income was much lower — he reported $4.22 billion and paid $973 million in income tax in those years. So he paid more than 20% on his reported income. The issue is that his wealth skyrocketed at the same time. This is something that plays out on a smaller scale for your average American homeowner or 401(k) holder, whose wealth grows without being taxed by the federal government every year. The difference is in scale. Also, everyday Americans likely pay property taxes and utilized mortgages to buy their homes.
Tax avoidance strategies. The report does show how the wealthy finance their lifestyles with loans taken against assets, like real estate or stocks, rather than realizing the value of an asset. They’ll pay less to the bank in interest than they would to the government in income tax.
Carl Icahn, the investor, gave an interview to ProPublica about his tax returns and it printed this illuminating response:
“There’s a reason it’s called income tax,” he said. “The reason is if, if you’re a poor person, a rich person, if you are Apple — if you have no income, you don’t pay taxes.” He added: “Do you think a rich person should pay taxes no matter what? I don’t think it’s germane. How can you ask me that question?”But in these cases, the loans do act as the income.
Other forms of tax. It’s also true that with so much of their wealth tied up in stock, they effectively pay tax through their companies; however, the corporate tax rate of 21% is far lower than the top rate of 37% on income over $523,000 for individuals. Notably, Bezos has endorsed raising the corporate rate (Trump and Republicans slashed it back in 2017), but as CNN has reported, it’s still unlikely his Amazon would pay anything close to either rate.
Even on the income the superwealthy do claim, often in the form of capital gains, they often pay a lower rate than Americans who make far less money. Taxes are very much in the policy conversation at the moment. President Joe Biden wants to raise both corporate tax rates and income taxes on the wealthy, although it faces a tough path forward in the US Senate, where the minority Republicans can block it.
Globally, and separate from this individual income tax conversation, Biden and his treasury secretary, Janet Yellen, are pushing for a global corporate minimum tax and other industrialized nations in the G-7 agreed to an outline this week.
The idea is that if everyone had at least a 15% corporate tax rate, it would keep companies from avoiding taxes.
All of this feeds into the growing frustration with extreme inequality and what governments should do to make sure everyone pays their fair share, which is increasingly complicated when so much wealth is locked away from the tax man and more and more people think the government should be doing more to improve people’s everyday lives.‘Why did they print this? Is it illegal?’ Less interesting to the larger world but really interesting to journalists like me was ProPublica’s separate story about how it got the tax documents and why it decided to selectively print them.
It is technically against the law to publish an individual’s tax information, although ProPublica argues the public interest in an informed tax debate justifies the risk. A spokesperson for at least one of the people whose taxes it dissects — that’s Bloomberg — is quoted as promising some kind of legal action, although against whoever or whatever leaked the documents, rather than ProPublica.
ProPublica doesn’t seem to know who the source of the documents is and even suggests it could have been a foreign actor, like China or Russia, that has shown an interest in stoking class resentment in the US. That means the reporting needs to be considered against the backdrop of the mystery of its provenance. It’s notable that none of the billionaires mentioned in the story deny the accuracy of the tax returns and some argue they were simply following the rules. Others did not respond, according to ProPublica.
When asked about the ProPublica report on Tuesday, White House press secretary Jen Psaki told reporters, “Any unauthorized disclosure of confidential government information by a person of access is illegal and we take this very seriously.” She said the IRS commissioner has referred the matter to investigators.
Sunlight > secrets. Given the status these men have in society, the deference their wealth affords them and the fact many of them have publicized their opinions on tax policy — either endorsing or opposing higher income taxes, corporate taxes and wealth taxes, I respect ProPublica’s decision.
Table of Contents
How Millionaires Avoid Taxes
Charitable donations
Giving money to non-profit organizations has long been a way for the wealthy to get a deduction on their taxes. And under the new tax law, the amount you can deduct has increased — to 60 percent of your adjusted gross income, up from 50 percent.
One way the rich have been taking advantage of the deduction is creating conservation easements, said Featherngill, who is also the national head of legacy and wealth planning at Abbot Downing in Winston-Salem, North Carolina.watch nowVIDEO02:20Getting the most out of your charitable donations
A big plot of land may have some intrinsic value. “Maybe it is on a migration field for birds, maybe it abuts a river or maybe it is some green space in an area getting overly developed,” she explained. “Often times you can work with land conservation trusts and you can take a charitable deduction for the value of the conservation easement that you put on the property.”
The average filer can, of course, also take a deduction for charitable contributions — but they have a higher hurdle to overcome. In order to do so, they have to itemize their taxes. The Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 for individuals and $24,000 for married couples filing in 2018, so the itemized deductions would have to exceed those amounts.
Increasing equity exposure, managing gains
The wealthy like to invest in stocks because when it comes time to sell, the taxes are typically lower than the rates on wage income — if, that is, the equity was held for more than a year. They can also afford to take bigger risks.
“Many who have higher net worth also have higher risk tolerance preferences and risk capacity, so target date and low risk funds don’t always make sense,” Carson said.
Long-term capital gains tax rates are zero, 15 percent and 20 percent for 2018, depending on your income. Federal tax brackets on wages go from 10 percent for the lowest earner to 37 percent for the highest. Short-term capital gains taxes on stocks held for less than a year are tied to your federal tax bracket.
The wealthy also look to manage those capital gains and losses to their tax advantage, Featherngill pointed out.
For example, there tends to be a “flurry of activity” at the end the year, with people trying to take losses to offset some of the gains they reaped earlier in the year. She’s also seeing people investing in opportunity zone programs, which invest in low-income communities, as a way to defer capital gains.
It’s something that can be done by anyone, not just the rich. “If the gain is sizeable enough, in terms of material enough for them, they can look at ways of deferring tax on the gains,” she said.
Managing assets like a business
One way to save on taxes is creating a structure — such as a limited liability company, or LLC — to manage multiple investments, said Featherngill. It could include portfolio assets, real estate or a business.
While it could get complex, there may be opportunities to save money while at the same time creating a governance structure for your assets, she explained. “If the LLC is a management company that provides oversight and advice to owners of the assets, under certain circumstances the expenses incurred by the LLC will be deductible as business expenses.”
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Estate and gift exemptions
Gift and estate deductions help bring down taxable income, but there is even more reason to take advantage of them now.
Thanks to the new tax law, the deductions have been temporarily doubled. Individuals can now claim up to $11.18 million, compared to the $5.29 million limit per person in 2017. The exemption expires after the end of 2025, so the wealthy are taking advantage, said Featherngill.
Many of them are setting up long-term trusts, such as a Delaware Dynasty Trust, which allows wealth to be passed down from generation to generation, she said. While it is subject to income taxes along the way, it will not be taxed as a gift if it meets the limit and will not be subject to estate tax when money comes out.
However, given the costs involved in setting up and running a multi-generation trust, it only makes sense when you have $5 million or more to commit, said Featherngill.
Defined-benefit plan
A defined-benefit plan, similar to an old-fashioned pension, allows business owners to contribute a substantial amount of money towards retirement.
In the right situation that can mean “well over $200,000 a year” for an individual owner, Carson said. “This can be a great way for a high net-worth individual running a successful business to set aside tax-deferred money above and beyond what they can put aside in a 401(k).”watch nowVIDEO01:05Here are your income tax changes for 2019
It is particularly appealing to the rich because of the limitations on the 20 percent qualified business income deduction that is a part of the new tax law. The cap on the QBI is $157,500 in adjusted income for single filers and $315,000 for married couples filing jointly.
The contribution to a defined benefit plan “will help bring down the individual’s taxable income, reducing their taxes for the current year,” Carson noted. It can also bring them down below the thresholds “in order to qualify for the 20 percent deduction.”
However, defined benefit plans won’t work for every high-income business owner. You need to figure out if it fits your retirement savings and business operational needs, Carson said.
Conclusion
Many millionaires and billionaires don’t pay taxes. Instead, they employ clever tax avoidance schemes to reduce their tax liability. There are many ways that rich people and corporations use to avoid paying their fair share of taxes. Many of these methods break the law and violate the spirit of the law.