💰 How the wealthy avoid paying taxes (3-step strategy):
A popular
report came out a few weeks ago on how the wealthy get away without paying much in the way of income taxes. For example, Warren Buffet saw his wealth expand by about $25B from 2014 to 2018, yet paid 0.1% in taxes. How?
Before we get to "how," as insane as it seems that Buffett paid less than 10 cents for every $100 he added to his wealth, I'm willing to bet that most people wouldn't pay more taxes then they are legally required. So those who are upset at Buffett really should be upset at the rules (tax code). Now, do the ultra wealthy have influence over these rules? Without a doubt, but that's another discussion.
But why not use the same 3-step strategy to reduce your tax burden so you can donate to who you choose instead of donating extra to the government?
Let's see how the wealthy do it in 3 Steps:
- First, they build and buy assets (like companies and real estate). As long as they don't sell these assets and take income there is no taxable event.
- Next, they borrow against these assets (collateral). For example, if you owned a company, you could pay yourself a $10M salary and it would be taxed as income at 37%+ OR you could borrow $10M with a single-digit interest rate with no taxes. As long as the assets continue to appreciate, you can refinance to infinity.
- This is a big "...as long as..." and is why you'll sometimes hear of an "ultra wealthy" person suddenly going bankrupt.
- The final step is to die. They set up trusts to avoid estate tax allowing their heirs and others to inherit these assets without the tax burden.
In summary, the wealthy buy assets, never sell, use debt against them to unlock the equity and avoid paying taxes. Buy. Borrow. Die.
I thought Mark Moss did a great job explaining this with regard to bitcoin:
