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HOW DO THE MEGA-RICH AVOID PAYING THE INCOME TAX?
By MARY LYNNE DAHL, Certified Financial Planner ™
July 18, 2021
Mary Lynn Dahl
(SitNews) Ketchikan, Alaska – According to recent media hype (June 2021), some of the richest people in the world don’t pay income taxes. Is that true? Well, maybe it is, but maybe not. It can be simply how the media, especially the notoriously fake social media, is selling to readers the “news” they are offering. It may be completely wrong, but it sure sells.
Even more important, however, is the question of whether it is actually possible for a billionaire to avoid income tax. Is that possible? The answer is yes, it is certainly possible. It is usually, probably almost certain, that it is the result of very careful planning by the mega-rich. How can they do that considering how rich they are?
There are several legal ways to avoid income tax. The most obvious thing is not to have any income. The mega-rich have wealth, but they are not allowed to earn wages. Without wages and income from work, you do not pay any income tax. For example, the careful plans they are developing to avoid income tax could be that all proceeds from their property go to a trust that pays the person’s expenses rather than paying those expenses itself. The trust would pay the tax, not the individual. The result would be that the person with no income would not pay any income tax. However, the trust could pay as much or more tax than the individual would have paid, but that may not have been the primary goal. Often times, assets are placed in a trust to protect those assets from other risks, but not from taxes. So if this is a strategy used by a very wealthy person, it just seems like they don’t pay income tax. Strictly speaking, that’s true, but it doesn’t show the whole picture.
Another tactic used by the super-rich is to give away large sums of money to a bona fide charity, sometimes every year. If you give enough away you can eliminate income tax, but you must have a huge fortune first. A good example of this is the share. If a wealthy person spent $ 1 million on stock 10 years ago and then donates it to a charity after it reaches $ 10 million in value, they can deduct the $ 10 million they donate to a charity from a federal income tax return . Withdrawing such a large amount will reduce or eliminate a ton of income taxes, and the mega-rich often make this tactic a central part of their ongoing budget. They manage their money by routinely giving away a large portion of it. Of course, as a billionaire, you still have so much fortune and money that giving away millions has absolutely no impact on your life or financial security. This is one reason why many billionaires, and even some millionaires, set up charitable organizations and foundations so that they can easily fund a charity of their choice as part of their normal money management plan. This strategy, if designed to do so, can also lower and / or eliminate income taxes.
A common way to pay less income tax is to buy real estate. This works for some people, at least, because owning real estate has some very significant tax advantages. If the property is an investment property that generates rental income, there are also expenses that can be deducted from that income. Rental property owners are allowed to write off their property, which is deductible. Actual costs of repairs and maintenance are also deductible, as are some of the direct costs of such maintenance, such as B. Household or meals in a B&B. These allowable deductions offset at least part of the income paid to the owner. When an owner purchases a large number of properties, those deductions in bulk can add up to many tax write-offs while still generating a lot of income.
Tax deductions and credits are designed to encourage investment and offset some of the risks associated with investing. Because of this, dividend income distributed to stockholders is taxed lower than normal income, at least for now.
We can argue all day whether this is fair or not, but as long as tax law allows any strategy, rich people will take advantage of statutory depreciation. Strategies such as trusts, real estate, charitable giving, and tax-free income (which are paid out to bondholders by certain municipal bonds) are popular. From time to time, Congress adds new tax laws or repeals existing tax laws and changes the rules. When this happens, tax attorneys make the books and study the new rules and new strategies are developed. It’s a constantly changing subject. However, other types of taxes may not be eliminated, but income taxes may often be reduced or avoided.
A much easier way to avoid income tax is to hold a large amount of cash in a regular cash account. It can be cash at the bank or credit union, and it can even be cash on a line of credit. If it is enough to support the person, for example for a year, he does not have to pay any income, since the money itself is not taxable; only the interest it earns is taxable. Today that interest rate is quite low, so it is entirely possible that the interest rate is too low to be taxable. This is a tactic used by wealthy people rather than mega-rich people, but the principle works for both. The cash was taxed when it was being generated as income and then remains in a low-interest or non-interest-rate account and is simply spent gradually. It won’t be taxed again when it is spent as it was already taxed when it was earned. A very wealthy person with a huge portfolio of stocks could easily afford to sell stocks on a regular basis and keep the money from selling stocks in a cash account in order to live off it for a long time. If the money does not earn interest, only the capital gain that was realized when the shares were sold is taxed. It does not trigger income tax because it has already been taxed as capital gains and does not generate any income.
I had known a woman for many years who had a large holding of municipal bonds that she inherited from her son when he was killed in a car accident. The interest paid on these municipal bonds was tax-free. This elderly woman had a small pension and benefits, and her house was paid for. Her expenses were minimal and she was quite frugal as she was careful with her money for years. In fact, she didn’t need a lot of income, so the interest on the bonds piled up. At her request, her financial advisor reinvested the non-taxable interest in additional municipal bonds. She paid no income tax for the last 15 years of her life, but when she died, her estate had over a million dollars in municipal bonds, each earning about 6% tax-free. Do the math. Though she hadn’t intended it, her late son had, and she had the tax break for the rest of her life.
The key to translating these tactics into an efficient strategy for minimizing income taxes is planning. Back to basics: plan, plan, plan. There should be a goal, a strategy for achieving the goal successfully, and a tactic for the strategy to work. That’s how it works. Planning is no accident. It is intentional and specific. That’s why it’s effective, whether it’s about minimizing taxes, building wealth, generating retirement income, or starting a business that will power the train for decades.
Of course, it takes many assets in the first place, so most billionaires and millionaires work to amass those assets first before focusing on the tax picture of their finances. Most started with a plan, took risks, succeeded, and eventually amassed enough fortunes to get mega-rich. With a number of good tactics at their disposal, some may actually pay little or no income tax, but almost all have paid a lot in other types of taxes and probably given away more than most people could ever earn.
The media will always cover it if it looks like a story that can be sold. So don’t believe everything you read or hear on social media, broadcast media, or from friends and gossip. Much is out of context or just not right.
Just know that it is actually possible to pay less or no income tax at all. If you want to achieve this, you will get to know a competent advisor, preferably a Certified Financial Planner ™, who will enable you to get started with this goal. It can be done.
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© 2021 Mary Lynne Dahl, CFP®
Mary Lynne Dahl is a Retired Certified Financial Planner TM. She is a partner and founder of Otter Creek Partners, a fee-based financial planning and investment advisory firm based in Alaska. These articles are general in nature and are accepted as general guidelines for investment or financial planning and are intended for educational and financial literacy purposes only.
Mary Lynn Dahl can be reached at firstname.lastname@example.org
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