US billionaire’s tax-saving schemes give ideas to others, as politicians see


U.S. tax updates

When a nonprofit news organization obtained the tax returns of thousands of America’s richest people a few months ago, it sparked a firestorm. ProPublica reports have shown how billionaires often pay little or no federal taxes, even in years when their wealth is exploding.

Some of those named in the reports have reacted with fury to the leak and threatened with legal action. Others scoffed at ProPublica’s framing, noting that the United States taxes income rather than wealth, and if the country wanted otherwise, Democratic Senator Elizabeth Warren would be president. Many of them proclaimed loud and clear their support for increasing taxes on the rich, even though they insisted they were following the letter of the tax code.

I suspect some of the billionaires named had another reaction in private: I think they were pretty proud of themselves. The leaked documents demonstrate the enormous benefits that can come from mastering Byzantine U.S. tax laws and using a few wise tax strategies. For a business or investment titan, being in the spotlight of ProPublica is just one more confirmation of his financial acumen – or, at least, that of his advisers. Likewise, it wouldn’t surprise me if a few financial advisers were fired after the ProPublica report came out, when their clients found out they had left money on the table.

The journalists involved wrote that they were motivated to fuel “the public debate on the future of our tax system”, and they did. Their reporting has already sparked activity in Congress. But the talk also provided a how-to guide for the ambitious wealthy across the United States.

Which entrepreneurs and angel investors will not now consider putting seed money in a Roth IRA? This is the individual retirement account designed for the American middle class, which a young Peter Thiel used to buy shares in the founder of PayPal, the start-up he founded in 1998, for a fraction of a dime. . Savers contribute after-tax income to a Roth IRA, and any investment gains it contains, as well as withdrawals during retirement, are untaxed. Few will hit the jackpot like Thiel, whose now fully diversified Roth IRA was valued at $ 5 billion at the end of 2019, according to ProPublica. But for anyone who can keep their income below the Roth IRA eligibility threshold in any given tax year, the vehicle could provide fertile soil for planting a few acorns.

Keeping your income low is, of course, the rule of the game when it comes to minimizing tax bills. Financial Planning 101 involves selling tax losses at the end of the year to crystallize capital gains losses that can be used to offset profits elsewhere, and find deductible expenses to reduce taxable income. The example of the billionaires at ProPublica should inspire everyone to think bigger (or, in terms of income, smaller).

Why take any income at all? If you can live off your wealth not by cashing it in but using it as collateral for a loan, why wouldn’t you want to live off the loan and let the underlying investments appreciate? You might even be able to do this throughout your life, and the tax authorities might never realize a capital gain, because – thanks to generous US inheritance tax rules – the basis for capital gains is reset to market value when your heirs inherit.

This “buy, borrow, die” strategy seems to be gaining popularity. Morgan Stanley wealth management clients have $ 68.1 billion in outstanding securities and other non-mortgage loans, more than double the amount they had five years ago, and Bank of America has $ 62.4 billion in securities lending, the Wall Street Journal reported. last month.

ProPublica’s Cut-and-Keep Guide to Minimizing Taxes is handy not only for wealthy Americans and their advisers, but also for politicians looking for ways to pay for massive new spending programs. Warren and fellow Senator Sheldon Whitehouse seized the reports to demand Congressional hearings. The bosses of wealth management could well be pulled over the coals. Powerful committee chairs have promised legislation. Polls show that the American public supports paying for infrastructure improvements by raising taxes for the rich.

So time may be running out for some of these tax planning strategies. Rich Americans with good advisers will use them while they can.

Stéphane is reading. . .

The last in the “Watashi no Rirekisho(“My Personal Story”) series of mini-autobiographies that has been part of the Nikkei newspaper since 1956: a 30-part epic about Boonsithi Chokwatana, chairman of the Thai group Saha – the country’s “king of consumer goods”

Follow Stéphane on Twitter

This article is part of FT Wealth, a section offering in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investing


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