15 Clever Tax Avoidance Strategies The Wealthy Don’t Want You To Discover

Have you ever thought about why the wealthy keep getting wealthier while the poor just keep getting poorer? While there certainly are many reasons behind it, one of the key factors is that people working three jobs don’t have the time to learn how to avoid paying taxes and, therefore, make more money. This, however, is the case for the ultra-rich! These people have enough time to learn how to spend the least amount of money and get the most out of their earnings, making the best use of every dollar they make. Here are the methods the wealthy use to dodge taxes.

Note: The content of this article is for informational purposes only and is not a substitute for professional advice. Always consult with a qualified professional for advice tailored to your individual circumstances.

This story was inspired by this article from ProPublica.

Don’t Sell!

The biggest trick in the book is the way that the wealthy invest. Investing only comes off as expenditures. It becomes income once you sell the stocks. To avoid paying interest, they avoid selling stocks. Moreover, they try to prolong their investment sales for at least a year. It helps drop the tax rate that they pay.

As long as they sell under a certain amount of stock per year, they don’t have to pay tax on it. It’s that simple.

Deduct, Deduct, Deduct

Do you rent an office for a side gig? Do you pay contract workers or employees? Do you buy office supplies, get your taxes done, or buy your own health insurance? If so, you can write off quite a lot of your income as tax deductions. Deductions, as a business owner, help drop your tax burden.

Most people shrink their income as much as they can when it comes time for Uncle Sam to take his share. Whether it’s through an HSA or funding your own health insurance doesn’t matter. That’s one tip you can take from the wealthy.

Losses Can Be Good

Did you recently incur a major loss? If it’s a major theft, fraud, or similar incident, you can write it off as a loss. That’s one of the reasons Jeff Bezos paid so few taxes. His business losses helped significantly cut his tax liability when his profits exploded.

Losses and depreciation can actually be written off twice in some cases. Such is the issue with sports team ownership, where owners often pay lower taxes than their millionaire players.

Not A Day Job

One of the more messed-up aspects of American tax law concerns the taxation of labor versus investments. Investment sales are taxed at a lower rate than regular labor. This is one reason why Warren Buffett, the famous American businessman, investor, and philanthropist, pays as little as he does while middle-class people feel the crunch on Tax Day. Investing is the easiest way to avoid taxation.

Roth IRA Control

You should get a Roth IRA that you control on your own terms. These retirement accounts are made for low- and middle-income individuals and come with great tax benefits. More importantly, you get to choose what goes into them. Peter Thiel stuffed his with Paypal shares back when the company was still new.

His Roth IRA is now worth a billion dollars because of the gains that stock made.

Donate

Philanthropy is not just a trendy thing among the wealthy. It’s also a way to help drop their tax rates. Charitable donations to IRS-approved nonprofits are totally tax-deductible. Moreover, many wealthy people tend to run nonprofits, which means that the money still becomes used in a way they see fit.

Is it sketchy? Yes, but so are a lot of tax avoidance methods.

No Salaries

One of the most fascinating things that the wealthy do is handle their money by refusing a salary. Many of the richest people only get $1 for their salaried income. Since labor has the highest tax rate, it makes little sense for them to ask for a higher paycheck when they can get that in other ways.

You might be wondering how they handle bills with only a dollar for their regular income.

Loans To Avoid Taxes

This is a nasty trick the ultra-wealthy do that won’t always work for regular joes. They take out loans (often with collateral) on the earnings they make. Since you have to pay back loans, that’s not considered income. They then use securities-backed stocks to take out loans for their business.

This allows them to “pay off” the loans on their earnings while getting much, much lower interest rates. Oh, and they have no tax to pay on it.

Research Tax Credits

A lot of the write-offs the ultra-wealthy enjoy are industry-specific. In most areas, there are also tax credits for accepting things like Section 8 vouchers, special credits for encouraging urban revitalization, and more.

Most millionaires and billionaires tend to have people research write-offs for them. Those write-offs tend to dictate the path of their businesses. Of course, these write-offs are mostly for businesses, which is why regular workers can’t access them.

Monetizing Hobbies

Billionaires also tend to monetize their hobbies and side projects as a way to write off the income they make from their main sources. For example, one billionaire raised horses to the tune of a $600 million loss. That loss ended up nulling most of his taxes for that year. As it turns out, even hobby losses can be written off, which is an extra reason to start a new hobby today!

Tax-Loss Harvesting

Let’s say that you suffer a major loss while doing your trading or business work. The rich have a way to offset losses, too. It’s called tax-loss harvesting, and it works fairly simply. If a stock tanks, you sell the stocks at a loss, then use that money to buy other stocks. The stocks sold at a loss can help offset gains from other stocks you sold. It seems fiction, but it’s true!

Estate Taxes? Nah.

When billionaires and millionaires pass away, they let their heirs inherit everything tax-free. How? Simple. They create tax-dodging trusts that allow them to escape the estate taxes, making it easy for them to give their loved ones everything. This is a great way to help the people you love to make the most of the money you have accumulated for years.

Private Placement Life Insurance Policy

A private placement life insurance policy may cost millions of dollars, making it only accessible to the ultra-rich. But what is its benefit? Here are two main ones. Number one, you can invest the premiums paid into the policy in high-growth investment options. Number two, if you cancel the policy, the money you’ll get back won’t get taxed. Great, right?

Mix Pleasure And Work

Wealthy people can also master the art of mixing pleasure with work. For instance, let’s say you want to spend a week in one of the most luxurious hotels in Cabo San Lucas and prefer to head there with a private jet. The ideal solution? Make sure you’re attending a business meeting while you’re there so you can deduct your private jet trip from your taxes and spend a week basking in the sun.

Municipal Bonds

Have you ever heard of municipal bonds? Commonly known as ‘muni,’ these are bonds issued by a local government or state. But what makes them so special? In several countries, including the USA, interest income received by holders of these municipal bonds can sometimes be exempt from taxation. This makes them the perfect solution to avoid paying extra taxes.

In other words, the moral of the story is that there’s always a way to dodge taxes. You just have to be rich.