In this article, you will have a read on some of the tax loophole strategies the rich employ.
Living on Loans
It may shock you that wealthy people often take out huge amounts of loans to fund their luxurious lifestyles. This is because borrowed money cannot be taxed, according to U.S law.
So, rich people will often borrow loans from big banks, and, to repay these loans, they will often have exchanged assets with the bank for the loan.
Elon Musk is one such example who exchanged a portion of his Tesla shares for a loan.
Income From Wealth
Most people get their income as salary from work. Rich people get income from wealth which often counts as investments. Investments (stock holdings, property, etc.) are not taxed, therefore income from them cannot be taxed.
Only when investment property or asset is sold will they be liable to tax.
Late Apple founder, Steve Jobs, and Facebook’s Mark Zuckerberg are just two of the many rich people known to use this strategy
Deferring Their Income
How tax law works is you get a deduction from your current year’s income. What if you do not make income in the current year? You do not pay taxes for income you did not get.
How the rich make use of this is to hold off a year’s profit for a future year. For example, if you work and you ask your employer not to pay you for 12 months until the next year, you will not have to include that year (current) in your tax filings. But you will have to file for tax whenever you receive the income.
Opening a Health Savings Account
A Health Savings Account is tax-deferred, meaning the financial contributions that accumulate towards it are not subject to taxes. Once the money has been withdrawn from the account, no taxes are paid unless the expenses are not medicinal expenditures. These accounts are also tax-deductible
HSAs are not available to everyone, though. To have a HAS, you need to participate in a medical insurance plan that is “highly deductible.” Contributions toward the account are limited to around $3500 a year for an individual, and $7000 for a family, though.
Deduct Expenses
Businesses, big and small, are entitled to some tax cuts. When filing taxes, big businesses tend to claim tax deductions due to such expenses as office supplies, travel, and working from home.
Of course, not everyone can claim tax deductions. Your business has to make a significant amount of profit for the IRS to consider it an actual business rather than a hobby. The IRS qualifies what is a true business based on:
How much of your time and effort goes into the activity?Whether it is your primary source of income. Whether you run the activity in a “businesslike manner. ”
Rich people tend to use this strategy to lower their taxes. Often, they will undermine the difference between business and personal expenses. One such example of this is former U.S President Trump. He claimed expenses to his house, flights, and hair grooming as business expenses when he filed his tax returns.
Hiring the Kids
Rich people save some extra cash on taxes by hiring their children. The IRS does not require taxes for a child not older than 18 years old if the business is owned entirely by the parent(s).
So, to take advantage of this, some rich people transfer profits to their children’s bank accounts as salaries. Donald Trump is one example of this method, as he is known to have once transferred finances to one of his children’s accounts without explanation.
Influence Tax Laws
Lawyers hired by rich people will often have direct access to and some level of influence over tax policymakers. Being knowledgeable in tax law, these lawyers can challenge proposed tax laws while they are not even out of the consideration stage. Due to limited finances and resources, the IRS will not want a costly debate in court.
Conclusion
Those were the tax strategies of the rich. While it may seem that rich are not paying their fair share of taxes, it’s still the loopholes in the law, so they aren’t doing anything illegal. Just a matter of knowing where the weak links are. Some of these strategies you can maybe try and see if they help save you some cash.
