Experts say these are the best legal tricks the rich use to avoid $ 163 billion in taxes

It’s no secret that wealthier Americans have a variety of tax avoidance legal tips available to them while most of us are working, getting a paycheck, and sending our taxes straight. to the federal government.

The recent massive presentation known as Pandora Papers shared information from companies hired by wealthy clients to set up offshore accounts and trusts in tax havens. Some secret accounts have been opened in well-known offshore havens such as Belize, Seychelles, Hong Kong and the British Virgin Islands, but the United States has emerged from the leak as a top tax haven. Accounts have been opened in U.S. trusts and structures, including 81 in South Dakota and 37 in Florida, USA Today reported.

According to the US Department of the Treasury, the richest 1% of Americans could avoid paying up to $ 163 billion in income taxes each year. Many of the super-rich are taking advantage of tax laws to legally evade tax, financial experts say.

Although U.S. tax rates rise with income, the ultra-rich often work the tax code. Some billionaires such as Tesla CEO Elon Musk and Amazon founder Jeff Bezos, the richest man in the world, pay little or no tax on their wealth, according to a ProPublica report. In 2018, Musk paid no federal income tax. The same was true for Bezos in 2007 and 2011.

In 2018, Michael Bloomberg, the 13th richest American on the Forbes list, reported income of $ 1.9 billion but paid $ 70.7 million in income tax, according to ProPublica. That’s a conventional tax rate of 3.7 percent. Between 2014 and 2018, Bloomberg had an effective tax rate of 1.3%. When Bloomberg ran for president in the 2020 election, a spokesperson said his charitable donations and taxes paid “amounted to about 75% of his annual income.”

ProPublica analyzed leaked copies of Berkshire Hathaway CEO Buffett’s tax returns between 2014 and 2018, and found he paid $ 24 million in federal taxes on $ 125 million in reported income. His net worth grew by about $ 24 billion during that five-year period. “No one of the richest 25 has avoided as much tax as Buffett, the hundred-billion-dollar grandfather,” ProPublica reported.

Most Americans earn wages and benefits from work and see their taxes appear as a line on their paychecks. The richest 1% may receive income from interest, dividends, capital gains or rent from investments known as capital income, CNBC reported. They may not see income on their tax returns because they may delay the sale of investments or use losses to offset capital gains.

Asset loans are probably one of the most popular and important ways for the wealthy to keep their income out of the IRS’s sights, said certified financial planner Sharif Muhammad, founder and CEO of Unlimited Financial Services in Somerset, New Jersey. They borrow money from their portfolio when they need cash, thereby eliminating the need to sell popular investments that can generate earnings. The wallet loan is not taxable or reported on an income tax return, Muhammad told CNBC.

Executives can also receive stock-based compensation, and when it’s time to sell, they can sell other losing investments in the same year to reduce their taxable growth to zero.

The super-rich also avoid capital gains tax by keeping their assets until they die and passing the property on to their heirs. The value of the inherited property usually adjusts to its value on the date of death, known as the “gross-up basis”.

President Joe Biden pushed for taxing capital gains on death, with a growth exemption of less than $ 1 million for single filers and $ 2.5 million for married couples. However, House Democrats removed the measure from their $ 3.5 trillion spending plan.

For the ultra-rich, wealth transfer tax is just as important as income tax, according to Lisa Featherngill, chief financial planner and national director of wealth planning at Comerica Wealth Management in Winston-Salem, in North Carolina.

When a person transfers wealth to their heirs during their lifetime, they can pay up to 40% federal inheritance or gift taxes on property valued over $ 11.7 million for individuals and $ 23.4 million for married couples, thanks to the tax reform of former President Donald Trump in 2017. These thresholds will drop to around $ 6 million and $ 12 million after 2025. Wealthy families offering freebies to reduce their taxable wealth before the 2026 deadline, Featherngill said.

Another estate planning strategy is a dynasty trust, which allows families to pass wealth from generation to generation without incurring estate taxes on each death.

Philanthropists can make charitable donations that allow them to claim a federal deduction if they itemize the tax deductions.

Wealthy families can donate to a donor-advised fund that benefits a charity or set up a private foundation if they want more control.

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