Debt can make some people rich and others poor. This is a paradox and a fact. Unfortunately, schools don’t teach us about money. The rich people know how to use debt to their advantage to avoid taxes. You may tend to think that the rich don’t have debts, but they are the people with high debts.
How the Rich Use Loans to Avoid Taxes
How to use debt to avoid taxes? In this article, we will look at how the rich use loans to avoid taxes legally and ethically.
1. Borrowing Against Assets to Avoid Taxes
Rich people use tax law doctrines to avoid taxes through debt. One of the tax doctrines normally used by the rich to avoid tax is the realization requirement. The doctrine requires that you pay tax when an asset generates an income.
For this reason, the rich are able to build their wealth on assets that appreciate without paying taxes. And since rich people have multiple streams of income, they don’t need to sell these assets. What happens is, that the asset keeps on appreciating over time hence increasing in value.
Once an asset has appreciated, the rich can use it as security to borrow a loan. The wealthy get cheaper loans since they can secure their loans using such assets. Besides, borrowing isn’t taxed, allowing them to get loans tax-free. When the rich die, their wealth is passed to their descendants with minimal tax. But many wealthy people hold assets without passing them to their heirs until their death.
2. Borrowing Against Stock Portfolios
The other strategy that rich people are using debt to avoid taxes is through stock portfolios. Rich people use their stock portfolio as security to get cheap loans and avoid capital gains tax. Elon Musk is known to use this strategy where he uses Tesla shares to get cheap loans.
Selling stocks attract capital gains tax which can be as high as 40% for high-income earners. If wealthy people need cash, instead of selling their stocks and getting slapped with such high capital gain tax, they prefer to use their stocks as collateral to get loans at cheaper rates.
Read also: How to use debt to build wealth.
3. Offsetting Taxes with Debt
The other way rich people avoid taxes is by offsetting taxes with debt. By reporting many expenses, rich people can avoid paying taxes. For instance, in 2007, Jeff Bezos paid zero income tax yet Amazon stocks almost doubled. Bezos reported an income of $46 million from interest and other investments. However, the tax payable he owed was offset by the many expenses he reported and loans he owed.
Other Ways How Rich People Avoid Taxes
Apart from debt, there are other ways rich people use to avoid taxes. Some of these ways are through charitable donations, keeping money in offshore accounts, investing in stocks, and receiving income in the form of shares and stocks and luxurious homes.
When the rich give to charity, they get tax deductions of up to 60%. Besides, gifts of up to $13,000 are not taxed. Tax haven countries also help the rich to stash their money in offshore accounts where it is not taxed.
Summary of Borrowing Against Assets to Avoid Taxes
While the poor pile up bad debt, rich people use debt to avoid paying taxes and yet invest the amount they borrow. Since loans have to be repaid back, they don’t count as income, hence they are not taxed. If you want to become rich, you need to know how money works and how you can leverage debt to avoid taxes. You need to make smart decisions that can set you set you apart from the poor.