When it comes to knowing how to reduce taxes, the rich seem to be adept at it. Some of them even pay less taxes than the average American because they know some methods to avoid taxes that work well to help them keep a lot more money in their pocket.
The methods used by the wealthy are not secret, but they may not be usable by everyone simply because they require large sums of money to get started. Here are some of those tools used by the rich to reduce their taxes.
Create Multiple Streams of Non-Taxable Income
The basic strategy used by the wealthy is to create streams of income that are non-taxable or nearly so. They also aim to purchase assets that appreciate rather than depreciate—like a car does. It ensures that their value continues to grow and not be reduced by a lot of taxes.Buying assets that appreciate usually requires a considerable amount of money to get started. These assets include real estate, stocks, bonds, art, exchange-traded funds (ETFs), certificates of deposits (CDs), savings accounts, and commodities.
The Rich Have Reduced Income
Taxes are based on income—whether you earn it through hourly wages, a salary, selling off an asset, or getting paid interest from stock or another asset. The rich seek to reduce their income and get their money in other ways.A brief look at the income of the rich will quickly reveal how effective this strategy works. According to ProPublica, the taxes paid by Warren Buffett and Elon Musk are two examples. Between the years 2014 through 2018, Warren Buffett earned $24.3 billion, reported only $125 million, and paid $23.7 million in taxes. Elon Musk saw his wealth grow by $13.9 billion, reported $1.52 billion in income, and paid only $455 million in taxes.
The rich use a tax-avoidance strategy of buying assets that gain in value, such as property and stock. These assets do not incur federal income tax on them until they are sold. Further property improvements are often tax deductible. Losses on stock are deductible and can help offset any gains.
Because the rich have considerable assets, they can borrow large amounts of money. With that money, they buy more assets that will appreciate. Also, Finance.Yahoo says that if the stocks dive, real estate values will probably continue to increase in value, which helps offset any stock losses. You can also get a tax deduction for any depreciation on real estate.
Depreciation
Claiming depreciation offers many opportunities for the rich to reduce taxes because it can be applied to many kinds of property—tangible and intangible. Finance.Yahoo says you can claim depreciation on rental properties, buildings, trucks, autos, furnishings, equipment for business or office, patents, copyrights, and more.
The Internal Revenue Service (IRS) says that items that qualify for depreciation must meet several criteria. The asset must be something you own, and it must be used in some way to help generate income. It cannot be something that you only use for personal purposes. Also, it must be able to last more than one year and have a determinable lifespan.
Create a Business
The rich like to create various businesses to help avoid taxes. Warren Buffett, for instance, owes nearly all of his wealth to Berkshire Hathaway, but he also has 65 subsidiaries in various industries. Elon Musk helped found six businesses, including SpaceX and Tesla. Jeff Bezos is responsible for helping create or buy 16 companies, including The Washington Post, but most of his wealth comes from Amazon.Having one or more businesses enables you to get many tax deductions. The IRS says the primary requirement to claim a business deduction is that the expense be necessary and ordinary for your business. Almost every business-related expense is tax-deductible, including organizational fees, office space, furnishings, computers and software, office equipment, business equipment, vehicles and maintenance, salaries, materials, cellphones, mileage, business meals, and more.
Create a Pass-Through Business
The Tax Cuts and Jobs Act (TCJA) allows small-business owners to deduct up to 20 percent of their taxable income if they have a pass-through business. Nolo says five business types qualify: sole proprietorships, partnerships, S Corporations, limited liability companies (LLC), and limited liability partnerships (LLP).The income must be qualified business income (QBI). It is the net profit your business earns. It is calculated by taking the total business income and subtracting all business deductions from it. Each business you own can enjoy a 20 percent tax reduction.
Avoid Capital Gains Tax by Reinvesting
After selling stock or an asset, instead of pocketing the money, the rich avoid capital gains tax by reinvesting some or all of it. Taxes are reduced by holding onto an investment for more than one year. This step enables you to reduce capital gains taxes, which only go up to 20 percent depending on your income. You can reduce taxes even more by buying a stock that does not pay dividends but reinvests it, enabling the value to rise even faster tax-free until you sell it.Move to a State With No Income Tax
Nine states do not charge income tax, allowing you to keep more of your income. RamseySolutions says those nine states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Alaska does not have a sales tax, but the cost of living there is one of the highest in the nation.Some of the no-income-tax states may also not charge taxes on interest earned from stocks, bonds, and retirement income such as from individual retirement accounts (IRAs) and 401(k)s. Some states will tax this income and may also have higher than average property taxes.
Most often, the rich avoid taxes by hiring experts on tax matters. They have financial experts plan each step they make when investing large sums of money. Before making your next investment, talk to an expert to learn how you can start accumulating more wealth that earns non-taxable income.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
