The more you earn, the higher taxes you should pay. Right? Not necessarily the case. Many rich people pay lower taxes compared to the average person. For instance, the U.S tax code is structured in such a way that the rich should pay higher taxes. However, the super-wealthy often take advantage of tax laws that allow them to avoid taxes. Tax avoidance is legal.
The super-rich have a way of categorizing their assets, allowing them to pay much lower taxes. For instance, Berkshire Hathaway CEO, Warren Buffett ones stated that his Secretary pays much higher taxes than he does. Why is it so? How do the rich avoid paying taxes? This article will help you find out; how do rich people avoid taxes?
How Rich People Avoid Taxes
You might be wondering, how do millionaires avoid taxes? The following are some of the ways on how the rich avoid taxes.
1. Wealth Transfer Taxes
One of the ways the rich avoid paying taxes is by holding assets until death. They avoid transferring property to their heirs until they die. This helps them avoid capital gains taxes. When you transfer property to your heirs, its value adjusts to what it is worth at the time of transfer or the date of death.
As such, the super-rich takes advantage of this and hold assets till they die. This means that the value of their assets will remain unchanged until their death. But in an actual sense, their assets keeps on appreciating over time. Once they die, their assets can be revalued during transfer to their heirs.
2. Managing Assets Like a Business
How do the rich avoid taxes by managing assets? Good question. Most of the super-wealthy people have investments in businesses like Limited Liability Companies, real estate companies and other asset portfolios. To help them manage their businesses, they start management companies that offer advice and oversight to their other businesses.
At some point, while managing the other businesses, some of the expenses incurred by the management companies will be deducted as business expenses. Yet, these business expenses go back to the same person; the owner.
For instance, a wealthy person can start a wealth management company to provide oversight to asset owners and managers. Some of the expenses incurred by the business will be deducted as business expenses.
3. Receiving Salaries in Stock Options
The other way rich people avoid taxes is by receiving salaries in stock options instead of cash. Stock profits are not taxable until you decide to sell stocks and realize gains. Elon Musk, the world’s richest person uses this strategy to avoid taxes where he receives a salary from Tesla in stock options. This means, instead of paying him cash, the company gives him shares in the company.
4. Charitable Donations
The other way rich people avoid paying taxes is through charitable donations. Some of the richest people giving away charitable donations include Bill Gates and Warren Buffett. When the rich give donations to non-profit making organizations, they get deductions of up to 60% on their taxes. This encourages the wealthy people to give donations to the charitable organizations. Gifts of up to $13,000 to anyone are tax excluded.
In addition, gifts of unlimited value to a spouse are not taxed at all. High net worth people take advantage of this fact and end up circulating their wealth in the family while writing it off. By so doing, they are able to deduct a significant market value from their tax liability.
Also read: How rich people spend their money.
5. Sending Money Overseas
The other way rich people avoid taxes is by registering businesses in tax haven countries. They then open oversea accounts and keep their money in them. These oversea companies often have lower tax rates. By so doing, they are able to get lower tax rates for their businesses and their income.
Some of the top tax haven countries in the world include British Virgin Island, Cayman Islands and Bermuda. You don’t need to be a resident of these countries to benefit from tax haven. Tax rates are usually very low, almost zero.
6. Investing in Stocks
One of the most common way rich people invest is through stocks. It is because stocks help them cut on taxes. When selling stocks, tax rates are by far lower than the rate on earned income, if the stock are held for more than a year. Since many rich people have high risk tolerance preference, they can afford to take bigger risks.
Capital gains taxes for stocks held for less than one year are tied to one’s federal tax bracket. Long term capital gains taxes are zero, 15% and 20%. On the other hand, federal tax rates range between 10% and 37%, depending on one's tax bracket. As such, high net worth people tend to take advantage of capital gain and losses.
7. Luxurious Homes
Do you know why many rich people own luxurious homes? It helps them avoid tax. The rich only need to spend at least 2 weeks in their luxury homes and they can term them as their second homes for tax avoidance. If the value of the luxury home appreciates over time, they can sell it at a very high profit.
Capital gains from the sale of the house will be taxed at a lower rate than salary. Besides, luxury homes can be rented for up to 2 weeks and the owner won’t be required to pay tax on rent income.
Also read: Best ways to tax the rich.
Summary of How Do Rich People Avoid Taxes
High net worth people are always looking for ways to lower the amount of taxes they pay. Tax avoidance is not illegal. While in actual sense the super-rich are expected to pay higher taxes, in most cases it is not always the case. The above are some of the ways the super-rich avoid taxes. Even the average person can use these means to avoid taxes.