More than $160 billion in tax revenue is lost each year because top 1% find ways to avoid paying “their fair shareaccording to academic research cited by the Treasury Department.
What tactics, however, do very wealthy people use to avoid taxes?
It turns out that not only can they afford tax lawyers, accountants and estate planners, but there are also tax benefits that require a lot of money to access. We are going to shed some light on some of these strategies available only to the extremely wealthy.
“As long as it’s done in a legitimate way and there’s no fraud involved, that’s fine with me,” said Ed Smith, senior tax and estate planner at Janney Montgomery Scott.
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How much tax do the rich avoid?
According US Treasury estimatesthe richest 1% pay less in taxes by $163 billion a year.
How the super rich avoid paying taxes
- Family offices
- Mobile home
1. Foundations: Some start with as little as $250,000, but a more attainable amount starts with millions.
- Immediate income tax deduction up to 30% of Adjusted Gross Income (AGI) for your contribution, but distribute only about 5% each year for charitable purposes. Since this 5% is calculated on the assets of the previous year, the first year does not require any distribution.
- Avoid the highs capital gains tax and effectively grow money tax. You can deduct the full fair market value of the shares you contribute and not pay capital gains tax. If the foundation sells, it only pays 1.39% excise tax on capital gains.
Example: Investing $250,000 in a private foundation each year for five years, earning 8% annually, yields approximately $1.43 million after excise taxes and minimum 5% annual distributions to charity. Compare that with $1.38 million if the money had been invested in a taxable account and paid capital gains taxes along the way.
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- Annual exclusion of gift tax. In 2022 the limit was $16,000 and in 2023 it is $17,000 per person. “If you have three children and 10 grandchildren, multiplied by two (me and my spouse), that’s $34,000 a year for the 13 people who are not part of your estate and a tax-free gift,” said David Handler, partner in the Trusts and Estates practice group at Kirkland & Ellis LLP.
- Lifetime tax exemption on donations, which is separate from the annual gift. For 2023, this is $12.92 million ($25.84 million for a married couple), and this amount generally increases each year based on inflation.
Note: The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the amount of lifetime gift tax until December 31, 2025. The amount reverts to the pre-TCJA amount of $5 million dollars, adjusted for inflation, unless Congress extends it.
3. Family office: Typically, it takes at least $100 million in assets to set up a single-family office.
If properly structured, it can offer personalized services that include investment management, financial planning, estate and tax planning, philanthropic investment, concierge services, and more. for family members with all the tax deductions of a business. The TCJA prevented individual taxpayers from deducting similar investment, accounting, tax, and advisory fees until 2025, but a family office might be able to take them.
“Big wealthy families have the ability to do this if they all agree and agree to make a business out of it and deduct what would not be deductible,” said Ed Smith, senior tax and estate planner at Janney. Montgomery Scott.
PrimeIf your children have skills that can be used in the family office or in other businesses, you can hire them and pay them a high salary that is spent on the business and passed on to the children, Smith said.
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The average US CEO salary as of January 26 was $812,100, according to Salary.com. How can this be when we always hear that CEOs make millions a year?
Unlike the bottom 99% who derive most of their income from wages and salaries, the top 1% derive most of their income from investments. From their work, they may receive deferred compensation, stock or stock options, and other benefits that are not immediately taxable. Outside of work, they have more investments that could generate interest, dividends, capital gains, or rents if they own real estate.
Note: Real estate investments offer another advantage as they can be depreciated and deducted from federal income tax – another tactic used by the wealthy.
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5. Change residence:
“Jacques-Paul promoted it to a whole new segment of the population,” tax attorney Adam Brewer said.
Professional boxer and American social media personalities Paul and his brother Loganwho is also an actor and wrestler, moved to Puerto Rico in part to avoid high US taxes.
Puerto Rico is particularly attractive because U.S. citizens who become bona fide Puerto Rican residents—merely moving does not count—can retain their U.S. citizenship, avoid U.S. federal capital gains tax, including U.S. source capital gains , and avoid paying taxes on interest and dividends from Puerto Rican sources.
Normally, US taxpayers would have to give up their US citizenship or green card to receive federal tax benefits.
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However, not everyone is ready to take the plunge. “A lot of people move to avoid state income tax,” Brewer said.
If you make a lot of money, you might not qualify for any income tax, especially since the Tax Cuts and Jobs Act has capped the amount at $10,000. national and local taxes (SALT) you can deduct from your federal taxes until 2025. If Congress does not act to maintain this cap, SALT deductions will once again become unlimited.
- New Hampshire
- South Dakota
Can we get the rich to pay more taxes?
These are just a few of the ways ultra-rich people can legally avoid taxes. Although President Joe Biden proposed a national wealth tax when he took office, it came to nothing and now some states are trying to impose their own.
California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington present proposals to tax the wealthy. Each state has its own approach, but typical strategies include taxing assets and lowering the estate tax threshold.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at email@example.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.