Do you want to pay less taxes? Great. Step one, be a rich person. Have no reportable income, always borrow instead.Then, buy a yacht. Or a sports team. Give a lot to charity. Lose some money in the stock market<\/a>. Above all, make sure most of your money exists in the form of assets, not cash \u2014 stocks, real estate, a Dutch master painting, fine jewelry, or whatever else strikes your fancy.<\/p>\n They say that money is a universal language, but it speaks at different volumes. When you have a fathomless bounty of wealth, money doesn\u2019t quite register as an expense until you add a lot of zeros to the end \u2014 so spending a lot to save a lot is a no-brainer. It\u2019s why the mega-rich often hire expensive tax lawyers, wealth managers, or even set up a whole office dedicated to tax strategy. \u201cIt\u2019s not just preparing the return,\u201d says a tax accountant. \u201cThere\u2019s so much more involved in planning, in accumulating, offsetting, and trying to mitigate the taxes as best as possible.\u201d<\/p>\n For the rich, taxes aren\u2019t a springtime affair with a quick visit to H&R Block, but a year-round endeavor.<\/p>\n How much tax a wealthy person owes in a given year is a complex tapestry threaded with exemptions, deductions, credits, and obscure loopholes you\u2019ve never heard of. The ideal is to owe zilch. If that sounds impossible to achieve, just look at the leaked tax returns of the wealthiest Americans<\/a> that nonprofit news site ProPublica analyzed.: Over several years, billionaires Elon Musk<\/a>, Jeff Bezos<\/a>, and Michael Bloomberg, among others, paid no federal income taxes at all.<\/p>\n How do they do it? Here are some basic rules they live by.<\/p>\n If your income is earned through wages paid to you by an employer, chances are your taxes are on the simpler side of the spectrum. Not as simple as it is for wage earners in other countries<\/a>, where the government simply tells you how much you owe, but getting a paycheck from your boss means your taxes are automatically withheld each pay period. Filing your tax return might be as easy as filling out one form.<\/p>\n You can pick and choose which deductions to take (like for student loan<\/a> interest, or for having a home office), but the vast majority of households<\/a> take the simpler standard deduction, which this year erases $14,600 from your tax bill. For tax year 2024, you\u2019ll pay a 37 percent tax on any income you rake in over $609,350. That sounds like it would add up to a sizable amount for multimillionaires and billionaires \u2014 unless that income is just a minuscule share of their increasing wealth.<\/p>\n Jeff Bezos, when he was still Amazon<\/a> CEO, had a base salary of around $80,000 a year<\/a>. Elon Musk doesn\u2019t take a salary at all at Tesla<\/a>. Apple<\/a> CEO Tim Cook<\/a> does get a $3 million salary, but it\u2019s a small slice of the $63 million<\/a> he received overall last year.<\/p>\n Most wealthy entrepreneurs are paid in bountiful stock rewards; Musk is currently fighting to keep his record-breaking Tesla pay package<\/a>, made up of a bunch of stock options and now valued at almost $56 billion. ProPublica found that, because their income fell below the threshold, at least 18 billionaires got a Covid-19 stimulus check<\/a>.<\/p>\n Paul Kiel, a ProPublica reporter who was an integral part of the newsroom\u2019s billionaire tax return stories<\/a>, says the income versus wealth divide was crucial in helping the public understand how differently the wealthy operate. \u201cIf you can avoid income as it\u2019s defined in our system, and still get richer, that\u2019s the best route,\u201d he tells Vox.<\/p>\n Stocks aren\u2019t taxed until they\u2019re sold \u2014 and even then, what\u2019s taxed is the profit on the sale, called a capital gains tax. Billionaires (usually) don\u2019t sell valuable stock. So how do they afford the daily expenses of life, whether it\u2019s a new pleasure boat or a social media company<\/a>? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.<\/p>\n Though the \u201cbuy, borrow, die\u201d strategy isn\u2019t quite as sweet right now because interest rates are high, a Wall Street Journal piece from 2021<\/a> notes that those with $100 million or more could get interest rates as low as 0.87 percent at Merrill Lynch. The taxable value of a stock also resets when it\u2019s passed on to an heir, so that if a wealthy scion chooses to sell their inherited stock, they\u2019d only pay a tax on the increase in value since the original owner\u2019s death.<\/p>\n If you do, regrettably, have to sell assets, fret not: just lose a lot of money, too, and pile on the offsets. \u201cWe do what\u2019s called tax-loss harvesting,\u201d says Wieseneck, using a simple example to illustrate. Say someone owns Pepsi stock, and it tanks. They sell at a loss, but then buy about the same amount of Coca Cola stock. The Pepsi loss can erase some (or even all, if you play your cards right) of the taxes owed on the gains made on Coca Cola stock.<\/p>\n \u201cDuring the year we try to accumulate losses,\u201d says Wieseneck. \u201cAt the end of the year, if I know you have a capital gain on a sale of a property or a house or another investment, I\u2019ll accumulate some losses for you that can offset [it].\u201d Capital losses don\u2019t also have to be applied in the same year \u2014 if you know you\u2019ll be selling more assets next year, you can bank them for later.<\/p>\n It\u2019s illegal to quickly sell and then buy the same stock again \u2014 a practice called a \u201cwash sale\u201d \u2014 just to save on taxes, but the key word is \u201csame.\u201d Public companies often offer different classes of stock that essentially trade the same, and it\u2019s not hard to trade similar-enough stocks back and forth. Exchange-traded funds (ETFs), for example, are like buckets containing a mix of stocks that can themselves be traded like a stock. A few different ETFs might perform roughly the same on the stock market; a person could sell one ETF and quickly buy another while avoiding the \u201cdo not sell and buy the same stock within 30 days\u201d rule.<\/p>\n Another tool in the tax shrinking arsenal: leveraging the differences in tax rates, which vary based on the type of asset and how long someone owned it. Long-term gains \u2014 assets held for longer than a year \u2014 from the sale of stocks and bonds are taxed at rates as low as zero percent and as high as 25 percent. Short-term gains, meanwhile, can face a tax as high as 37 percent. Collectibles, which include art, antiques, cards, comic books<\/a>, and more, have a max rate of 28 percent.<\/p>\n The basic strategy here is to always get the lowest tax rate possible for your gains. A favorite tactic of billionaire investor Jeff Yass<\/a>, according to reporting from ProPublica, is to place bets both for and against large companies, trying to amass a bunch of short-term losses on one end and long-term gains, which already enjoy a lower tax rate, on the other.<\/p>\n Another kind of magic trick is to place high-tax income into lower-tax or no-tax wrappers, which can include things like tax-advantaged retirement accounts. One example is what\u2019s called the private placement life insurance policy, a niche product that only the very wealthiest of the wealthy use. It can cost millions of dollars to set up, so it\u2019s not worth it unless you\u2019re rich, but the premiums a policyholder pays into the policy can be invested in high-growth investment options, such as hedge funds. The money you\u2019d get back if you decide to cancel the policy isn\u2019t taxed, but it\u2019s not even necessary to take the money out. You can borrow money from the policy at low interest rates, and its benefits pass on tax-free to beneficiaries upon the original holder\u2019s death. It\u2019s insurance, says Michael Kosnitzky, co-chair of the law firm Pillsbury Winthrop Shaw Pittman\u2019s Private Client & Family Office practice group, \u201cbut it also holds investment assets and, like any permanent insurance policy, the cash surrender value grows tax free.\u201d<\/p>\n A recent report<\/a> from Sen. Ron Wyden (D-OR), the chair of the Senate Committee on Finance, laid out how big the scheme had gotten, currently sheltering at least $40 billion. The report found that the average net worth of people with such life insurance policies<\/a> was over $100 million.<\/p>\n When you\u2019re very rich, it\u2019s important to treat everything as a business expense. Private jets are expensive luxuries, but the cost can be fully tax deductible if the plane is mostly being used for business \u2014 and what counts as \u201cmostly business\u201d isn\u2019t clear cut. Maybe you take a trip on your jet partly to take a business meeting, but also to spend a few relaxing days in a beautiful getaway spot. Private jet owners often set up LLCs and rent out their planes when they\u2019re not personally using them to take advantage of the tax deduction, reported ProPublica<\/a>.<\/p>\n In fact, many expensive hobbies of the ultra-rich coincidentally turn into business expenses \u2014 yachts, racehorses, golf courses, and more. They\u2019re often run very professionally, says Kiel, \u201cbut never quite seem to make a profit.\u201d<\/p>\n \u201cGenerally you\u2019re not supposed to write stuff off that\u2019s a hobby,\u201d he continues. \u201cBut the wealthier you are, the more your hobbies appear to be businesses or are operated like businesses.\u201d<\/p>\n Despite the ubiquity of this practice, there\u2019s risk to it, especially as the IRS ramps up audits of tax write-offs for private jets<\/a>. If the wealthy are going to buy exorbitantly expensive yachts and claim it\u2019s being used for a business, says Kosnitzky, \u201cyou\u2019d better be on very solid ground.\u201d<\/p>\n Charity is a time-worn way the ultra-rich reduce their taxes \u2014 and it has the added bonus of putting a nice luster on their reputation. Many charitable organizations set up by billionaires are tax-exempt, and charitable donations are tax deductible. You can completely control when to make a donation, and of what size, depending on how much taxable income you have in a given year; it\u2019s a nimble method of offsetting taxes.<\/p>\n But the worthiness of charitable deductions can be questionable, because they\u2019re \u201cvery, very loosely regulated,\u201d says Kiel. The donations themselves can range from buying mosquito nets to prevent malaria to \u201cpaying for your kid\u2019s private school.\u201d Recall, for example, that former President Donald Trump<\/a> once used money from his foundation to buy a painting of himself<\/a>. Often, the wealthy can pour money into foundations and funds with philanthropic aims without actually distributing that money to anyone. One popular charitable medium today is called a donor-advised fund<\/a>. Rich people put their money into these funds, and \u201cadvisers\u201d who manage the account eventually give away the money \u2014 eventually being the key word. Even if the money hasn\u2019t gone to a good cause yet, donors can take the tax deduction right away.<\/p>\n In other cases, what raises eyebrows is whether an ostensibly charitable organization actually serves a public good. These charities get tax-exempt status because they\u2019re supposed to have a \u201cpro-social\u201d purpose, says Daniel Reck, an economics professor at the University of Maryland who recently co-authored a paper analyzing tax evasion among the ultra-rich<\/a>. Some billionaires claim their foundations qualify because they\u2019re opening up a historical mansion or private art collection to the public. In fact, there are many examples of tax-exempt organizations not holding up<\/a> their end of the bargain. As ProPublica reported<\/a>, the historic landmark Carolands Chateau enjoys tax benefits but is open to the public just two hours per week. A private art gallery established by the late billionaire Sheldon Solow only recently became open to visitors<\/a>, despite some of the art being held in a tax-exempt foundation.<\/p>\n Also crucial to utilizing charity as a tax avoidance strategy is pumping up the value of your generosity. \u201cYou donate some fancy piece of fine art to a museum, you get an assessment for the art, it\u2019s much more than you could actually ever sell it for,\u201d explains Reck. \u201cYou get a big tax write-off.\u201d It\u2019s not just fine art, either \u2014 one popular form of overvaluation (until Congress passed a bill<\/a> putting an end to it last year) involved inflating the value of land. Called a \u201csyndicated conservation easement,\u201d it took advantage of an incentive for environmental conservation, in which landowners who agree not to develop their land would get a tax break proportional to the fair market value of the land. \u201cThe game is that people just massively, ludicrously inflate these fair market values,\u201d says Reck. In the syndicated version of this tax break, a group of investors buys land, gets an overvalued assessment<\/a> on it, and shares the tax write-off between themselves. \u201cNow there are a bunch of court cases about it,\u201d Reck says.<\/p>\n Some of the above tactics occupy an ambiguous, blurry zone of legality \u2014 it might be okay or not on a case-by-case basis. Some wealthy people may be alright with the risk, but Kosnitzky notes that it isn\u2019t wise to play the \u201caudit lottery\u201d \u2014 there\u2019s also reputational risk to consider. For those determined to take an \u201caggressive\u201d tax position, a lot of documentation and even having their lawyer prepare a memo defending their tax strategy may be necessary. They might still end up paying a penalty and owing taxes, but exactly how much is up for negotiation.<\/p>\n The paper Reck co-authored found that sophisticated tax evasion methods used by the very wealthy, including evasion through pass-through businesses<\/a> or offshore accounts, often goes undetected by random audits. This suggests that current estimates of the \u201ctax gap,\u201d or the difference between taxes paid to the IRS and the amount it\u2019s actually owed, is very likely an undercount.<\/p>\n The difference between avoidance (legal) and evasion (illegal) is hard to untangle at times because wealthy people will dispute their audit, deploying brilliant tax lawyers to argue that the government is mistaken. These battles can take years to settle. It\u2019s not just that the IRS needs a bigger budget to do all the audits it wants to \u2014 it did get extra funding in the Inflation Reduction Act<\/a> \u2014 but that auditing a wealthy taxpayer is costlier, and much more time-consuming, than auditing a poor one. The structures of the well-off\u2019s businesses are often extremely complex, too, which also makes auditing them more expensive.<\/p>\n![\"\"](\"https:\/\/www.sterlingcooper.info\/blog\/wp-content\/uploads\/2024\/03\/Screenshot-359.png\")
<\/p>\nDon\u2019t take a paycheck<\/h3>\n
![\"\"](\"https:\/\/www.sterlingcooper.info\/blog\/wp-content\/uploads\/2024\/03\/Screenshot-356.png\")
<\/p>\nPlan on losing money<\/h3>\n
Play tax rate arbitrage<\/h3>\n
Business or pleasure?<\/h3>\n
![\"\"](\"https:\/\/www.sterlingcooper.info\/blog\/wp-content\/uploads\/2024\/03\/Screenshot-358.png\")
<\/p>\nPhilanthropy pays<\/h3>\n
The gray area and the illegal stuff<\/h3>\n
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<\/p>\n