Billionaires are often scrutinized for the ways they manage to pay significantly less in taxes compared to the average person. The methods they use are legal but can seem unfair to those who pay a larger proportion of their income in taxes. Here’s a look at some common strategies billionaires use to save on taxes, illustrated with real-world examples.
1. Capital Gains Over Income
One of the primary ways billionaires save on taxes is by earning money through investments rather than salaries. Capital gains, the profit from the sale of assets or investments, are typically taxed at a lower rate than ordinary income.
Example: Warren Buffett, CEO of Berkshire Hathaway, famously advocates for paying lower taxes on capital gains. Despite his enormous wealth, he draws a relatively modest salary, with the majority of his wealth tied up in Berkshire Hathaway stock, which he sells sparingly to minimize tax liability.
2. Tax-Deferred Accounts
Billionaires use tax-deferred accounts like IRAs and 401(k)s to postpone paying taxes on their earnings until retirement, when they may be in a lower tax bracket.
Example: Peter Thiel, co-founder of PayPal, reportedly turned a Roth IRA, a retirement account funded with after-tax dollars, into a tax-free investment vehicle worth billions. He invested in early-stage startups, including Facebook, within his Roth IRA, allowing the investments to grow tax-free.
3. Charitable Donations
By making substantial charitable donations, billionaires can reduce their taxable income through deductions. This not only benefits the philanthropist through tax savings but also supports various causes.
Example: Bill and Melinda Gates have donated billions through the Bill & Melinda Gates Foundation. These charitable contributions significantly reduce their taxable income, while funding important global health and education initiatives.
4. Real Estate and Depreciation
Investing in real estate offers various tax benefits, including depreciation. Depreciation allows property owners to deduct the cost of their investment over time, even if the property's value is increasing.
Example: Donald Trump has utilized real estate depreciation to lower his taxable income. By claiming depreciation on his properties, he has legally reduced his tax burden, sometimes paying little to no federal income tax in certain years.
5. Tax Havens and Offshore Accounts
Using offshore accounts and tax havens, billionaires can shelter a portion of their wealth from taxes. These jurisdictions often have low or no taxes on certain types of income.
Example: The Paradise Papers leak revealed that Apple, the world’s largest technology company, moved parts of its operations to Jersey, a tax haven, to avoid billions in taxes. While Apple isn’t a person, the executives and major shareholders, like Tim Cook, benefit from the company’s tax strategies.
6. Estate Planning and Trusts
Estate planning strategies, such as setting up trusts, help billionaires reduce estate taxes and pass on wealth to their heirs with minimal tax liabilities.
Example: The Walton family, heirs to the Walmart fortune, uses a combination of trusts and charitable donations to manage their estate taxes. By placing assets in trusts, they can control the distribution of wealth and minimize the estate tax burden.
7. Carried Interest
In the financial industry, hedge fund and private equity managers often earn a significant portion of their income through carried interest, which is taxed as a capital gain rather than ordinary income, leading to substantial tax savings.
Example: Stephen Schwarzman, CEO of Blackstone Group, benefits from the carried interest loophole. His earnings from managing funds are taxed at the lower capital gains rate, rather than the higher ordinary income rate.
Conclusion
The tax strategies used by billionaires to minimize their tax liabilities are complex and often require professional legal and financial advice. While these methods are legal, they highlight the disparities in the tax system that allow the ultra-wealthy to pay a smaller percentage of their income in taxes compared to ordinary workers. Understanding these strategies not only sheds light on the intricacies of tax law but also fuels the ongoing debate about tax reform and economic equity.
By Sunny Wadhwani
May 19th, 2024
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