At a Glance
The way the tax code is set up, the more money you make, the higher percentage you pay on taxes. However, billionaires are experts at claiming deductions and moving money around to ensure they pay as little taxes as possible. Here are some loopholes to do your taxes like the 1%.
The top 4 things billionaires do to pay less on taxes
You’re not alone if you paid your taxes last week and were shocked at how much you owe the IRS. The average American pays about 28.4% of their income in taxes. According to Business Insider, if you break it down by gross revenue, most people filing taxes make between $50,000 and $75,000 yearly. In that group, the average tax bill was $4,567 in 2020.
There are four major things that billionaires do to cut back the amount they will owe come April. Copying what the billionaires do might just put more money back in your pocket come next tax season.
Is the number of people In 2020 who filed taxes that made more than $10,000,000. On average, they paid $7,914,363 to the IRS for federal income tax.
Own your own business
Owning your own business brings almost unlimited potential for how much money you can make. It also means you can use tons of tax deductions to keep more money in your pocket.
Billionaires know all about these deductions, and that’s part of the reason why the vast majority of billionaires are business owners. Travel could be a potential deduction if you leave your tax home for work. If you use a car for work, there’s another deduction. If you have a dedicated home office, you can deduct that portion of your residence when filing your taxes. If you’re spending money on anything business related, there’s likely a deduction that you can make to lower the amount subject to income tax.
It’s important to be truthful when it comes to business-related deductions. However, you should also put in the effort to maximize the deductions you could qualify for. Keep track of everything you spend related to your business throughout the year to make it easier come tax time.
If you are a business owner, you can also hire your children, saving both you and your kids money come tax time. If your child is under 18 and works for a company where only the child’s parents are owners, their income is not subject to Medicare or Social Security tax. There’s also the standard deduction of $13,850 for 2023 that isn’t subject to income tax. This means you can hire your kids and pay them tax-free up to almost $14,000. Not only that, but your children’s wages would be deductible as a business expense.
You can also roll forward your business losses. Usually, we consider losses to be a bad thing, but they can help you in future years when you have to pay taxes. If your company loses money one year, you can roll that forward to a future year as a deduction, which lowers your overall taxable income for that year.
A 401(k) is a retirement account that you should be contributing to each year. If you work for a company, you can put up to $22,500 in 2023 in your 401(k) tax-free. However, if you are a business owner and open up a solo 401(k), that number shoots up to $66,000, which you can contribute tax-free. You would have to submit a different form come tax time, but that is a small price to pay for an additional $40,000+ deduction.
Get your money to work for you
Your money should be working for you, not the other way around. Income can be taxed as high as 37%, which is a significant amount for the ultra-wealthy. However, you can invest in real estate investment trusts or master limited partnerships, which are taxed at lower rates. You can also invest in stocks or real estate to claim this deduction. If you invest money into high-yielding dividend stocks, you can collect dividends regularly and then sell that stock when it has appreciated. You will pay a capital gains tax on the profit, but that should be lower than income tax. You can also deduct property tax if you act as a landlord on real estate investments. Investing is a great way to utilize loopholes on taxes and also make passive income, which is key to any billionaire’s success.
Sell real estate you inherit
Billionaires often have generational wealth, which means they likely inherit property and money when someone dies. Through the “step-up in basis,” billionaires can avoid paying taxes on the profit from the sale of a property they inherit. Let’s say you purchase a property for $500,000 and keep it for a few years, do a few renovations to up the value, and then sell it for $900,000. You will owe taxes on the $400,000 profit.
If a billionaire were to inherit that home when someone passed, they could immediately sell it and avoid paying any taxes on the profit. When the property transfers ownership through inheritance, it’s like it was purchased new at the current market value. If the parents were to sell the house or transfer ownership before they passed, they would owe a substantial amount in taxes.
Use insurance or HSA to your advantage
Whole life insurance can be seen as both life insurance and an investment opportunity. Billionaires receive tax-deferred growth throughout the policy lifetime on whole life insurance and can potentially receive tax-free distributions under the right circumstances. Then, when the policyholder passes, the beneficiary receives that money tax-free.
A health savings account is also a goldmine for tax loopholes. Any contributions to an HSA are tax deductible. Earnings in the account are also tax-free. Distributions are tax-free if used for qualifying healthcare expenses, but non-related expenses get a 20% fee. However, billionaires over 65 can withdraw money from their HSA for any purpose without paying a fee. They will still need to pay income tax on that money if they don’t spend it on healthcare. Note that contributions are limited, just like they are for a 401(k).
The ultra-wealthy know all about tax loopholes allowing them to keep more money in their pockets. Taking advantage of these deductions means setting yourself up for future success and helps you avoid shelling out unnecessary money to the government. It’s clear that there’s a recurring theme with each of these four loopholes: move money around. Invest as much as you can in property, life insurance, HSAs, stocks, or other expenses, which maximizes deductions. When billionaires lower the total amount of taxable income they have, they can potentially save hundreds of thousands of dollars come tax time.