Sometimes, or should I say most of the time, the rich aren’t as hardworking as you think they are. They’re just smart enough to know how, when, where and which pawns to move and play around the maze or the loopholes of the tax system while earning more, of course the most legal possible way.
And in no particular order, we’ll be talking about the top 10 ways that rich people do to avoid paying taxes.
Not all types and sources of income are the same and so is the imposition of taxes on different countries in the world. Let’s take a look at how the rich keep their money from the hands of Uncle Sam.
This Post is about how rich people avoid paying taxes in 10 ways
Click on the video down below, if you do not want to read the article:
NUMBER 1: Investing in stocks
Well, this has to be the most common way that we know rich people do with their money, but the wealthy do not only do this out of pure investment.
When you own a corporation, pretty much you have an option whether or not to get compensated or whatnot. Billionaires like Elon Musk, who owns Tesla and SpaceX, agreed to a compensation plan with the board of directors of Tesla that anchors his personal earnings to the company’s valuation and revenue. In other words, Musk only receives compensation if Tesla reaches certain market values which in May 2020, he was eligible to purchase 1.69 million TSLA shares (about 1% of the company) at below-market prices, about $800 million worth.
The owner or the CEO won’t pay any taxes on that compensation until they sell their stock. Well, generally, any profit everybody makes on the sale of a stock is taxable at either 0%, 15% or 20% if you held the shares for more than a year or at your ordinary tax rate if you held the shares for less than a year.
NUMBER 2: Building corporations
In a federal tax system, corporations are liable to pay 21% of their income to Uncle Sam. Now what? Why do they need to spend a big amount of money for a company that aims to avoid paying huge taxes? This sounds dumb, right? But why not? They’re billionaires anyway.
The thing is, when you run a corporation and it earns an income, the tax system sees it as money owned by the corporation itself and not you. And again, corporate taxes are only at 21% compared to income derived from salaries which is at 37% that companies pay their employees and executives.
And we’ll begin wondering what is a company without a workforce? You can’t just be sitting all day alone working for your multimillion-dollar company sipping your self-made coffee because no one’s there to do that for you. Well, the money that you put into building your company becomes your business’ capital, which simply means that the cost of the physical building is directly your company’s asset.
Now, imagine the amount of tax withheld if you keep that same amount of money in your pocket instead of putting it in a business at a corporate level which at the same time earns profits!
A lot of celebrities are even building their own empire in fashion, beauty, and clothing in hopes of earning more and at the same time, safeguarding their money from huge taxes.
Number 3: Borrowing money from banks
Since we are already on the topic of building businesses, you might wonder how this trick works. Isn’t it an extra liability for your company? Why, yes, of course! But rich people have pretty much brilliant financial advisors or experts to turn this liability into another opportunity!
Let’s say, you already have an existing business and in order to acquire more assets or for the sake of starting another business, you borrow money from a bank, which the proceeds are completely tax-free. So, how do you pay off this debt? Well, you have the profits from your existing business to offset it.
Tax is imposed on net taxable income and net taxable income is derived from deducting business expenses from your gross total revenue, including interest expense of the money you borrowed from the bank, which means paying your debt lowers the tax you owe to the government.
Now, what happens to the money you borrowed from the bank? Of course, it’s already yours, but make sure to put it to good use, most preferably, just for business purposes.
Speaking of which, there is however another way for you to earn from your fixed assets which will be the next item on our list.
Number 4: Reinvesting profits
Let’s say, you bought a mansion in LA using the money you borrowed from the bank and you decided to sell that property for a higher price obviously, then you are subjected to pay the Capital Gains tax. If you’ve held the mansion for over a year, that mansion may be subject to 0% tax if the total income is below $38,000 and for $400,000 and above, it will be taxable at 20%. BUT if you reinvest the profits back to real estate no matter your income, then you’ll pay zero in taxes.
Assets like real estate properties increase in value over time, so you’ll have to make sure you’re earning a huge chunk when selling it and repeat that over and over and over.
Number 5: Depreciation
Some things lose their value over time, in accounting this is what is called depreciation. Common examples are buildings, cars, computers, and many more where billionaires take advantage of.
If a building you own depreciates, the net taxable income decreases as the depreciation value is also being deducted to your gross revenue from your business, which means significantly lowering your income tax.
Let’s take McDonalds for an example which also applies to the previous strategies we mentioned in this video.
When you hear McDonalds, you imagine crispy fried chicken, burger or fries. But the truth is, McDonalds is more than just a fast-food company. It’s more like real estate. How?
McDonalds expands their business by offering a franchise that allows business-minded people to open their own McDonalds branches. McDonalds then buys a piece of property intended for their branch location. The franchisee, which now becomes a tenant, pays a rental fee to McDonalds which is now the landlord.
So, how does depreciation come into picture using this illustration?
Remember that buildings are fixed assets that eventually lose its value as time passes by. Every year, the depreciation value increases which makes the income tax lower. This saves the company from expenses and adds profitability as well.
Number 6: Shell Companies
Another interesting trick that many wealthy corporations use is the use of shell companies which are companies that do not have a physical location, no products sold or even any employees but are used to hold bank accounts and transfer money without being taxed.
A good example of this is Apple, which reportedly had around $285 billion hidden offshore. As a multinational company, Apple would have to pay US taxes from money that was made in other countries and would have to pay the taxes from the country it operates in and the rest would be paid to the US in order to complete that 21%.
To avoid this, Apple decided to create a company in Ireland where corporate taxes are 12.5%, another in the Netherlands, and lastly they have another company in Ireland that has a legal residency in Jersey, an island in France that does not impose corporate taxes.
So, the company in Jersey who owns all the patents and the intellectual property, licenses the properties to the company in the Netherlands, which works more of a bank account, then subleases the property to the one in Ireland, which is the company that takes care of their international operations.
This means that when someone buys Apple products in Europe, the money goes to the Irish company that takes care of the operations, this money briefly reflects in a Dutch bank account before returning to Ireland. Since the company is legally registered in Jersey, it cannot be taxed and that is how a shell company without a physical location is used to transfer money tax-free.
Number 7: Tax Havens
A tax haven is a place that offers little to zero taxation to corporations in hopes of avoiding taxes in their home country, whose secrecy of business profiles to the public allows almost no one to have access or trace which wealth belongs to who.
There are about 55 tax havens across the globe like the Bahamas, Bermuda, Jersey, the British Virgin Islands, the Netherlands and the Cayman Islands, to name a few.
There has to be a legal structure to set things up like transferring ownership from your company in the US to the Bahamas by stating, for example, that you have to pay your sister company in the Bahamas for their licensing and patents just like shell companies. This reduces your taxes by declaring a lower income that you earned in the US due to the expenses in setting up a company in the Bahamas.
In 2015, $15.5 billion in profits made their way to Google Ireland Holdings……. in Bermuda where the tax rate is zero. Other big companies taking advantage of tax havens are:
- Apple – Who have over $200 billion offshore.
- Nike – It holds $12.2 billion offshore.
The 50 biggest U.S. companies which earn over 4 trillion a year hoard approximately $1.6 trillion offshore. These include Microsoft, IBM, General Electric, Exxon Mobil, Chevron, and Walmart.
This however has a disadvantage. Once you’ll transfer the money from the Bahamas to the US, you will be of course taxed accordingly at 21%.
Along with this, in December 2017, the European Union published its first ever blacklist of
tax havens. Blacklisted countries face sanctions from the EU which currently are American Samoa, Guam, Samoa, Trinidad and Tobago and US Virgin Islands, which do not include the major tax havens we mentioned in this video.
Number 8: Death/Estate tax
The bottom line is, we all don’t get out of here alive. Might as well set up something for your loved ones before the curtain call and, well, in hopes of avoiding huge taxes.
Believe it or not, many wealthy people take advantage of this trick by using what is called a GRAT or Grantor Retained Annuity Trust. This is basically an estate planning tactic in which a grantor or owner locks assets in a trust from which they earn annual income and are used by wealthy individuals and startup founders to minimize tax liabilities.
GRATs still are a financial instrument to minimize taxes on large financial gifts to family members where an irrevocable trust is created for a certain period of time. The grantor or the individual forming the trust establishes a gift value upon trust creation and assets are placed under the trust and an annuity is paid out annually. When the trust expires, the beneficiary receives all the assets stipulated therein tax-free. How brilliant is that?
Number 9: Buying artworks
Looking for a creative life hack? Try art!
Sometimes, we feel like being a billionaire is a lot of stress, especially when you make a lot of money — a lot of taxable money to be exact.
Well, this trick doesn’t really require you to be an avid art collector or a fan of creative stuff at all!
The first step is to buy a piece of artwork, but you can’t just buy it anywhere you like though. This is an exclusive art market that consists of only a few exquisite galleries or dealers of artworks that are sold for the first time and get resold for much higher prices at another two major auction houses or secondary markets.
This exclusive market takes a percentage of how much these artworks are sold. So basically, they are like brokers. They pick the artists themselves and they promote them and they pretty much become the most sought-after artists with the most expensive artworks regardless of their genre in art or how beautiful or abstractly confusing their artworks are. But since Uncle Sam is haunting you on your tax statements, you’d want to negotiate and finalize a price and get the job done as soon as possible.
Now, the next thing to do is to look for some place to store the artwork. Yes, you heard that right and your wife isn’t going to be as happy as she would expect to finally decorate your home with an expensive artwork. So make sure to set her expectations first.
So, you’ll be needing a storage facility that will serve as your newly-bought piece of artwork ‘s home along with 1.2 million others valued at an estimated $100 billion. Reports say this facility is located in Geneva, Switzerland which is called a freeport where you can store your artwork anonymously which makes it invisible to tax authorities.
Since this already sounds like a tutorial, let’s move to the next step which is to assume that your artwork is already valued at a very hefty price after how many years of sitting in that “warehouse”.
Let’s put in the figures this way:
You originally bought a piece of artwork at $10 million in 2019. Suppose that 3 years later, it is already valued at $40 million and it’s time to look for a buyer. Now, $40 million is a hefty amount of money and you couldn’t even dare to imagine what your sales tax is going to look like if you do really sell that artwork to somebody. Well, what you can do is to donate that artwork to a museum and put that $40 million as a deduction to your total income significantly reducing your tax dues.
Say, you have about $80 million in taxable income, and because you made a “generous” donation from that artwork worth $40 million, since the federal tax code only allows you to deduct no more than $30 million for donations, that makes your taxable income into $50 million. Without the donation, you’d be paying 21% of that $80 million to Uncle Sam which, of course, will make you a bit teary-eyed. But what happens to the remaining $10 million in supposed donation? Don’t worry, you can distribute this amount over the next 5 years.
Just a disclaimer, this is not professional advice.
Number 10: Buying cars
Now, this last item on our list is like the awakening. Let’s dig in!
So, how does the rich reduce their taxes by buying cars?
EASY. Buying the car through your company using your company funds. It will make it seem like a company property, but if you have a brilliant tax expert who knows something about the so-called “hummer loophole,” then, you can take as much as a 100% deduction in taxes!
To explain in simpler terms, the bigger the car, the bigger the deduction. Two of the vehicle types under consideration are light vehicles and heavy vehicles. Light vehicles refer to anything that weighs under 6,000 pounds. If you choose a larger truck or van, around 6,000 to 14,000 pounds, the federal tax code section 179 gives you a much larger deduction on that.
Of course, you know how strict the IRS is on tax codes especially if you’re a billionaire, so you will really need a tax expert to guide on reducing your tax liabilities. But sometimes even car companies are directly advertising this strategy on tax savings on their websites like the Mercedes, Land Rover and other SUV dealerships.
A few luxury cars that experts believe are qualified for the tax deduction requirement are the Mercedes, Lamborghini Urus, the Audi SQ8 and even more the Tesla model X.
Although this law was created for farmers to be able to buy heavy trucks for cultivating their land, now it’s being used by the world’s richest people to take advantage of the tax deductions.
Which do you think should have higher taxes, corporations or employees? Do you think the rich are just being smart or is it that the world isn’t really fair? Let’s try to keep our arguments as healthy as possible in the comments below.
