How do rich people avoid taxes? Wealthy Americans avoid $160 billion in taxes every year
More than $160 billion in tax revenue is lost each year because The top 1% find ways to avoid paying “their fair share‘ according to a scientific study cited by the Treasury Department.
But what tactics do overly wealthy people use to evade taxes?
It turns out that not only can they afford tax attorneys, accountants, and estate planners, but there are some tax benefits that require big bucks to even be claimed. We’ll look at some of these strategies that are only available to the extremely wealthy.
“As long as it’s legal and there’s no fraud, I’m fine with it,” said Ed Smith, senior tax and estate planner at Janney Montgomery Scott.
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How Much Tax Do Rich People Avoid?
Accordingly US Treasury Department estimatesthe top 1% of the rich underpay $163 billion annually in taxes.
How the super rich avoid taxes
Give a gift
change of residence
1. foundations: Some start as low as $250,000, but a more achievable amount starts in the millions.
Immediate income tax deduction of up to 30% of Adjusted Gross Income (AGI) for your contribution but only give around 5% per year to charity. Since this 5% is calculated on the previous year’s assets, no distribution is required in the first year.
Avoid high Capital Gains Tax and allow money tax to grow efficiently. You can deduct the full market value of the shares you contributed and pay no capital gains tax. If the foundation sells, it only pays 1.39% consumption tax on the capital gains.
Example: Investing $250,000 annually in a private foundation that earns 8% annually yields a return of approximately $1.43 million after excise taxes and a minimum 5% annual charitable distribution. Compare that to $1.38 million if the money had been placed in a taxable account and capital gains taxes had been paid.
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Annual gift tax allowance. In 2022 the limit was $16,000 and in 2023 it will be $17,000 per person. “If you have three children and ten grandchildren times two (me and my spouse), that’s $34,000 a year for every 13 people coming from your estate, and a tax-free gift,” said David Handler, partner at the Trusts and Estates Practice Group at Kirkland & Ellis LLP.
Lifetime gift tax exemption, which is separate from the annual gift. For 2023, it’s $12.92 million ($25.84 million for a married couple), and that amount generally increases each year due to inflation.
note: The Tax Cuts and Employment Act of 2017 (TCJA) doubled the amount of the lifetime gift tax through December 31, 2025. The amount will be reset to the pre-TCJA amount of $5 million, adjusted for inflation, unless Congress extends it .
3. Family office: Typically, you need at least $100 million in assets to start a single family office.
When properly structured, it can offer personalized services that include investment management, financial planning, estate and tax planning, philanthropic investing, concierge services, and more for family members with all of the tax deductions of a business. The TCJA has blocked individual taxpayers from deducting investment, accounting, tax and similar advisory fees until 2025, but a family office could take them on.
“Large wealthy families have an opportunity to do this if they all agree and get along by making a deal out of it and deducting what wouldn’t be deductible,” said Ed Smith, Senior Tax and Estate Planner at Janney Montgomery Scott.
bonus: If your kids have skills that can be used in the family office or other businesses, you can hire them and pay them a hefty salary that will be spent on the business and passed on to the kids, Smith said.
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Unlike the bottom 99%, who get most of their income from wages and salaries, the top 1% get most of their income from investments. From 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 can generate interest, dividends, capital gains, or rent if they own real estate.
note: real estate investments offer another benefit because they can be written off and deducted from federal income taxes—another tactic used by wealthy people.
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5. Change of residence:
“Jake-Paul promoted it to a whole new segment of the population,” said tax attorney Adam Brewer.
Professional boxer and American social media personality Paul and his brother loganwho is also an actor and wrestler, moved to Puerto Rico, among other things, to avoid high American taxes.
Puerto Rico is particularly attractive because U.S. citizens who become residents of Puerto Rico in good faith–simple relocation does not count–can retain their U.S. citizenship, avoid U.S. federal income tax on capital gains, including U.S.-source capital gains, and pay no income tax 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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But not everyone is ready to take that leap. “A lot of people move to avoid state income tax,” Brewer said.
If you’re a big earner, you might not benefit from any income tax, especially since the Tax Cuts and Jobs Act caps it at $10,000 State and Local Taxes (SALT) You can deduct from your federal taxes until 2025. If Congress does not act to maintain this cap, the SALT deductions will revert to unlimited.
Can we get rich people to pay more taxes?
These are just a few ways ultra-rich people can legally avoid taxes. Although President Joe Biden proposed a national wealth tax when he took office, that didn’t go anywhere and now some states are trying to impose their own.
California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington present proposals for taxing the rich. 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 for 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 every Monday through Friday morning.
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This article originally appeared on USA TODAY: How the rich avoid taxes by using strategies only available to them
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