Do you want to pay less taxes? Great. Step one, be a rich person. Then, buy a yacht. Or a sports team. Give a lot to charity. Lose some money in the stock market. Above all, make sure most of your money exists in the form of assets, not cash â stocks, real estate, a Dutch master painting, fine jewelry, or whatever else strikes your fancy.
They say that money is a universal language, but it speaks at different volumes. When you have a fathomless bounty of wealth, money doesnât quite register as an expense until you add a lot of zeros to the end â so spending a lot to save a lot is a no brainer. Itâs why the mega-rich often hire expensive tax lawyers, wealth managers, or even set up a whole office dedicated to tax strategy. âItâs not just preparing the return,â says Paul Wieseneck, a tax accountant and director of the Fuoco Group. âThereâs so much more involved in planning, in accumulating, offsetting, and trying to mitigate the taxes as best as possible.â
For the rich, taxes arenât a springtime affair with a quick visit to H&R Block, but a year-round endeavor.
How much tax a wealthy person owes in a given year is a complex tapestry threaded with exemptions, deductions, credits, and obscure loopholes youâve never heard of. The ideal is to owe zilch. If that sounds impossible to achieve, just look at the leaked tax returns of the wealthiest Americans that nonprofit news site ProPublica analyzed in 2021: Over several years, billionaires Elon Musk, Jeff Bezos, and Michael Bloomberg, among others, paid no federal income taxes at all.
How do they do it? Here are some basic rules they live by.
Donât take a paycheck
If your income is earned through wages paid to you by an employer, chances are your taxes are on the simpler side of the spectrum. Not as simple as it is for wage earners in other countries, where the government simply tells you how much you owe, but getting a paycheck from your boss means your taxes are automatically withheld each pay period. Filing your tax return might be as easy as filling out one form.
You can pick and choose which deductions to take (like for student loan interest, or for having a home office), but the vast majority of households take the simpler standard deduction, which this year erases $14,600 from your tax bill. For tax year 2024, youâll pay a 37 percent tax on any income you rake in over $609,350. That sounds like it would add up to a sizable amount for multimillionaires and billionaires â unless that income is just a minuscule share of their increasing wealth.
Jeff Bezos, when he was still Amazon CEO, had a base salary of around $80,000 a year. Elon Musk doesnât take a salary at all at Tesla. Apple CEO Tim Cook does get a $3 million salary, but itâs a small slice of the $63 million he received overall last year. Most wealthy entrepreneurs are paid in bountiful stock rewards; Musk is currently fighting to keep his record-breaking Tesla pay package, made up of a bunch of stock options and now valued at almost $56 billion. ProPublica found that, because their income fell below the threshold, at least 18 billionaires got a Covid-19 stimulus check.
Paul Kiel, a ProPublica reporter who was an integral part of the newsroomâs billionaire tax return stories, says the income versus wealth divide was crucial in helping the public understand how differently the wealthy operate. âIf you can avoid income as itâs defined in our system, and still get richer, thatâs the best route,â he tells Vox.
Stocks arenât taxed until theyâre sold â and even then, whatâs taxed is the profit on the sale, called a capital gains tax. Billionaires (usually) donât sell valuable stock. So how do they afford the daily expenses of life, whether itâs a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax. Though the âbuy, borrow, dieâ strategy isnât quite as sweet right now because interest rates are high, a Wall Street Journal piece from 2021 notes that those with $100 million or more could get interest rates as low as 0.87 percent at Merrill Lynch. The taxable value of a stock also resets when itâs passed on to an heir, so that if a wealthy scion chooses to sell their inherited stock, theyâd only pay a tax on the increase in value since the original ownerâs death.
Plan on losing money
If you do, regrettably, have to sell assets, fret not: just lose a lot of money, too, and pile on the offsets. âWe do whatâs called tax-loss harvesting,â says Wieseneck, using a simple example to illustrate. Say someone owns Pepsi stock, and it tanks. They sell at a loss, but then buy about the same amount of Coca Cola stock. The Pepsi loss can erase some (or even all, if you play your cards right) of the taxes owed on the gains made on Coca Cola stock.
âDuring the year we try to accumulate losses,â says Wieseneck. âAt the end of the year, if I know you have a capital gain on a sale of a property or a house or another investment, Iâll accumulate some losses for you that can offset [it].â Capital losses donât also have to be applied in the same year â if you know youâll be selling more assets next year, you can bank them for later.
Itâs illegal to quickly sell and then buy the same stock again â a practice called a âwash saleâ â just to save on taxes, but the key word is âsame.â Public companies often offer different classes of stock that essentially trade the same, and itâs not hard to trade similar-enough stocks back and forth. Exchange-traded funds (ETFs), for example, are like buckets containing a mix of stocks that can themselves be traded like a stock. A few different ETFs might perform roughly the same on the stock market; a person could sell one ETF and quickly buy another while avoiding the âdo not sell and buy the same stock within 30 daysâ rule.
Play tax rate arbitrage
Another tool in the tax shrinking arsenal: leveraging the differences in tax rates, which vary based on the type of asset and how long someone owned it. Long-term gains â assets held for longer than a year â from the sale of stocks and bonds are taxed at rates as low as zero percent and as high as 25 percent. Short-term gains, meanwhile, can face a tax as high as 37 percent. Collectibles, which include art, antiques, cards, comic books, and more, have a max rate of 28 percent.
The basic strategy here is to always get the lowest tax rate possible for your gains. A favorite tactic of billionaire investor Jeff Yass, according to reporting from ProPublica, is to place bets both for and against large companies, trying to amass a bunch of short-term losses on one end and long-term gains, which already enjoy a lower tax rate, on the other.
Another kind of magic trick is to place high-tax income into lower-tax or no-tax wrappers, which can include things like tax-advantaged retirement accounts. One example is whatâs called the private placement life insurance policy, a niche product that only the very wealthiest of the wealthy use. It can cost millions of dollars to set up, so itâs not worth it unless youâre rich, but the premiums a policyholder pays into the policy can be invested in high-growth investment options, such as hedge funds. The money youâd get back if you decide to cancel the policy isnât taxed, but itâs not even necessary to take the money out. You can borrow money from the policy at low interest rates, and its benefits pass on tax-free to beneficiaries upon the original holderâs death. Itâs insurance, says Michael Kosnitzky, co-chair of the law firm Pillsbury Winthrop Shaw Pittmanâs Private Client & Family Office practice group, âbut it also holds investment assets and, like any permanent insurance policy, the cash surrender value grows tax free.â
A recent report from Sen. Ron Wyden (D-OR), the chair of the Senate Committee on Finance, laid out how big the scheme had gotten, currently sheltering at least $40 billion. The report found that the average net worth of people with such life insurance policies was over $100 million.
Business or pleasure?
When youâre very rich, itâs important to treat everything as a business expense. Private jets are expensive luxuries, but the cost can be fully tax deductible if the plane is mostly being used for business â and what counts as âmostly businessâ isnât clear cut. Maybe you take a trip on your jet partly to take a business meeting, but also to spend a few relaxing days in a beautiful getaway spot. Private jet owners often set up LLCs and rent out their planes when theyâre not personally using them to take advantage of the tax deduction, reported ProPublica.
In fact, many expensive hobbies of the ultra-rich coincidentally turn into business expenses â yachts, racehorses, golf courses, and more. Theyâre often run very professionally, says Kiel, âbut never quite seem to make a profit.â
âGenerally youâre not supposed to write stuff off thatâs a hobby,â he continues. âBut the wealthier you are, the more your hobbies appear to be businesses or are operated like businesses.â
Despite the ubiquity of this practice, thereâs risk to it, especially as the IRS ramps up audits of tax write-offs for private jets. If the wealthy are going to buy exorbitantly expensive yachts and claim itâs being used for a business, says Kosnitzky, âyouâd better be on very solid ground.â
Philanthropy pays
Charity is a time-worn way the ultra-rich reduce their taxes â and it has the added bonus of putting a nice luster on their reputation. Many charitable organizations set up by billionaires are tax-exempt, and charitable donations are tax deductible. You can completely control when to make a donation, and of what size, depending on how much taxable income you have in a given year; itâs a nimble method of offsetting taxes.
But the worthiness of charitable deductions can be questionable, because theyâre âvery, very loosely regulated,â says Kiel. The donations themselves can range from buying mosquito nets to prevent malaria to âpaying for your kidâs private school.â Recall, for example, that former President Donald Trump once used money from his foundation to buy a painting of himself. Often, the wealthy can pour money into foundations and funds with philanthropic aims without actually distributing that money to anyone. One popular charitable medium today is called a donor-advised fund. Rich people put their money into these funds, and âadvisersâ who manage the account eventually give away the money â eventually being the key word. Even if the money hasnât gone to a good cause yet, donors can take the tax deduction right away.
In other cases, what raises eyebrows is whether an ostensibly charitable organization actually serves a public good. These charities get tax-exempt status because theyâre supposed to have a âpro-socialâ purpose, says Daniel Reck, an economics professor at the University of Maryland who recently co-authored a paper analyzing tax evasion among the ultra-rich. Some billionaires claim their foundations qualify because theyâre opening up a historical mansion or private art collection to the public. In fact, there are many examples of tax-exempt organizations not holding up their end of the bargain. As ProPublica reported, the historic landmark Carolands Chateau enjoys tax benefits but is open to the public just two hours per week. A private art gallery established by the late billionaire Sheldon Solow only recently became open to visitors, despite some of the art being held in a tax-exempt foundation.
Also crucial to utilizing charity as a tax avoidance strategy is pumping up the value of your generosity. âYou donate some fancy piece of fine art to a museum, you get an assessment for the art, itâs much more than you could actually ever sell it for,â explains Reck. âYou get a big tax write-off.â Itâs not just fine art, either â one popular form of overvaluation (until Congress passed a bill putting an end to it last year) involved inflating the value of land. Called a âsyndicated conservation easement,â it took advantage of an incentive for environmental conservation, in which landowners who agree not to develop their land would get a tax break proportional to the fair market value of the land. âThe game is that people just massively, ludicrously inflate these fair market values,â says Reck. In the syndicated version of this tax break, a group of investors buys land, gets an overvalued assessment on it, and shares the tax write-off between themselves. âNow there are a bunch of court cases about it,â Reck says.
The gray area and the illegal stuff
Some of the above tactics occupy an ambiguous, blurry zone of legality â it might be okay or not on a case-by-case basis. Some wealthy people may be alright with the risk, but Kosnitzky notes that it isnât wise to play the âaudit lotteryâ â thereâs also reputational risk to consider. For those determined to take an âaggressiveâ tax position, a lot of documentation and even having their lawyer prepare a memo defending their tax strategy may be necessary. They might still end up paying a penalty and owing taxes, but exactly how much is up for negotiation.
The paper Reck co-authored found that sophisticated tax evasion methods used by the very wealthy, including evasion through pass-through businesses or offshore accounts, often goes undetected by random audits. This suggests that current estimates of the âtax gap,â or the difference between taxes paid to the IRS and the amount itâs actually owed, is very likely an undercount.
The difference between avoidance (legal) and evasion (illegal) is hard to untangle at times because wealthy people will dispute their audit, deploying brilliant tax lawyers to argue that the government is mistaken. These battles can take years to settle. Itâs not just that the IRS needs a bigger budget to do all the audits it wants to â it did get extra funding in the Inflation Reduction Act â but that auditing a wealthy taxpayer is costlier, and much more time-consuming, than auditing a poor one. The structures of the well-offâs businesses are often extremely complex, too, which also makes auditing them more expensive.
Reck noted that rich people dispute a greater share of the tax that the IRS says they should pay after an audit. In the middle of the income distribution, about 10 percent of the auditorâs recommended adjustment is disputed, says Reck. Among people with the highest income, however, the disputed share exceeds 50 percent. âThat suggests that the taxpayer and their advisers, at least, believe that theyâre either in some gray area or were allowed to do what they did.â
âWeâve talked to a lot of former IRS agents, and they would often hear the line that for wealthy taxpayers, their tax return is like an opening offer,â says Kiel.
How the very rich lose money, overvalue art, buy very expensive life insurance, and somehow profit.
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