How the Super-Rich Avoid Paying Taxes
We often hear about people wanting to hold the rich accountable and make them pay their fair share in taxes. This implies that the super-rich aren’t paying as much in taxes as those who aren’t wealthy do. But what does this mean and how do the super-wealthy do it? Talk to your financial advisor about what you can do to reduce the taxes you’re paying.
Anyone who is employed, whether it’s for an organization, the government, or for yourself, will owe federal income taxes. Depending on where you live, you’ll most likely also owe state income taxes. This is one way the super-rich get out of paying taxes. They aren’t technically employed by anybody. They’re not even self-employed. Their money doesn’t come from anything that the government classifies as income, so they don’t have to pay income tax on it.
If they don’t make any income, then how are the super-rich actually making any money? The answer is investments. The super-wealthy aren’t paid in taxable money but instead in company stock. Their wealth is tied up in investments that aren’t taxable as income. These investments do have value, which is why they’re considered wealth. However, they’re not classified as income and so they’re not taxed in the same way as income would be.
Income and wealth are two different things. Income is the actual flow of money that you earn. As an employee, this would be your paycheck. Wealth, on the other hand, is the value of any assets, such as investments or property, that you own. The super-rich may have little to no income but have an extremely high value of wealth due to properties and investments.
The wealthy do pay taxes, but they just pay a lower percentage of taxes than the average American does. They’re able to arrange for their wealth to be taxed at a lower rate by channeling it through a corporation or taking out a loan against an asset instead of realizing their asset’s value by selling investments.
Another strategy the super-rich use to avoid paying as much in taxes is to pay taxes through a corporation instead of personally. Corporate taxes are lower than income taxes. By treating their income as corporate profits instead of their own personal income, they can pay a lower tax rate.
With a lot of money tied up in investments, the super-rich might not have a lot of money readily available to fund their lifestyles or large purchases. They could sell some stocks or other investments, but then capital gains on those investments would be realized and would then be taxable. To avoid this, they instead take out a loan against one of their assets, like their property or stocks. The amount of interest they pay when they do pay off the loan is lower than the taxes they would pay by realizing the value of that asset or receiving income.