The rich can avoid $ 163 billion in annual taxes. How they do it

Jeff Bezos, left, and Elon Musk

Getty Images; Reuters

Richest Americans can dodge up to $ 163 billion in income taxes each year, according to the US Department of the Treasury, and many financial experts rely on tax laws to do so legally.

Although US taxes increase with income, the ultra-rich often bypass the tax code to reduce the amount they owe. And some billionaires, like Amazon founder Jeff Bezos and Tesla CEO Elon Musk, pay little or no tax on their wealth, according to a report from ProPublica.

“As long as you follow the law, you’re fine,” said certified financial planner Sharif Muhammad, founder and CEO of Unlimited Financial Services in Somerset, New Jersey.

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While most Americans earn money through work, like wages and benefits, the super-affluent can receive income from interest, dividends, capital gains or rent, investments, called capital income.

Everyday Americans typically cover taxes through their paychecks, although the 1% may not see any income on their tax returns because they can delay the sale of their investments or use the losses to offset capital gains.

For example, an executive may receive stock-based compensation, and when it is time to sell, he may sell other losing investments in the same year to reduce their taxable growth to zero, Muhammad said.

Another popular tactic, asset lending, allows the wealthy to borrow money from their portfolios when they need cash, eliminating the need to sell popular investments that can generate earnings. In addition, the portfolio loan is not taxable or reported on an income tax return.

“This is probably one of the most important ways for them to keep that income out of the jurisdiction of the IRS,” Muhammad said.

The rich often hold assets until death, thus avoiding capital gains tax by passing the property on to 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 has called for taxing gains on death, with an exemption for growth 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 last week.

Taxes on asset transfers

“For the ultra-rich, it’s not all about income tax,” said Lisa Featherngill, CFP and national director of wealth planning at Comerica Wealth Management in Winston-Salem, North Carolina. “The tax on wealth transfers is just as important.

When a person passes on wealth to heirs or donates assets during their lifetime, they may be subject to up to 40% federal inheritance or gift tax on property valued at more than $ 11.7 million for individuals and $ 23.4 million for married couples, thanks to former President Donald Trump’s 2017 tax. revision.

While those thresholds will drop to around $ 6 million and $ 12 million after 2025, House Democrats want to lower the exemption to $ 5 million to help fund their spending plan.

For the ultra-rich, it’s not all about income tax. Equally important is the tax on wealth transfers.

Lisa Featherngill

Director of Wealth Planning at Comerica Wealth Management

In the meantime, wealthy families are giving freebies to reduce their taxable wealth before the 2026 deadline, Featherngill said.

They also use estate planning strategies, such as so-called dynasty trusts, which allow families to pass wealth from generation to generation without the risk of paying estate taxes on each death.

House Democrats have offered to use some of these popular techniques to help fund their budget plan.

Those who are philanthropic can also make charitable donations, allowing donors to claim a federal deduction if they itemize tax deductions.

Wealthy families can donate to a so-called donor-advised fund, which benefits a charity over time. Those who make larger donations who want more control can set up a private foundation, Featherngill said.

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