7 Tax Loopholes the Rich Use To Pay Less and Build More Wealth
Written by
Jordan Rosenfeld
Edited by
Kristen Mae
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There are a variety of ways to get wealthy and stay wealthy. However, not all methods are just about having a high-earning job. In fact, many wealthy people are super skilled at using all the tax loopholes available to them to minimize their taxes and maximize their wealth.
Here are some of the key tax loopholes the rich use to attain and keep as much of their wealth as possible.
Lose Money on Purpose
Can you imagine being so wealthy that it’s to your advantage to lose money? That’s one strategy the wealthy use, known as “tax-loss harvesting.” It turns out there are tax benefits to losing some of your wealth, though never enough to actually make you poor.
Typically what the wealthy do is sell investments when they are low, then make other similarly valued investments, essentially balancing out any gains made with the losses taken. Not only does this keep your money invested, it reduces your tax liability.
Roll Losses Forward
Wealthy people often start numerous business ventures. Yet, not every business turns a profit immediately. When that happens, it’s considered a “net loss.” The IRS allows for business owners to carry forward an operating loss to a year when it might make more tax sense for the business by lowering that year’s taxable income.
Stick High-Tax Income Into Tax-Advantaged Accounts and Policies
There are numerous ways the wealthy make money beyond just earning basic income — typically through forms of investing. The wealthy often take gains they make from investments, stocks, real estate and dividends and put those otherwise highly taxable amounts into their tax-advantaged accounts, such as retirement accounts.
The uber-wealthy have another trick, which is to buy into very pricey private placement insurance policies, which earn interest. You can not only invest the insurance policy money in high-growth options like hedge funds, you can borrow money from this asset, and if you cancel the policy and get all your money back you won’t be taxed. Additionally, you can leave these policies tax-free to beneficiaries.
Take Small Salaries
If you earn any income from an employer and receive a W-2 at the end of the year, most people pay their share to the IRS before their paycheck hits their bank account. The more you earn, the higher your tax bracket leaps, meaning the more you pay in taxes. The wealthy, particularly when they’re running companies, often take very small salaries to get around paying big taxes. For example, Jeff Bezos’ base salary (before stock compensation and other benefits) was only around $81,000.
Instead, they make their money on things like stock packages and the gains they can earn from selling them.
Write Off Expensive Assets for Business Use
Anyone who works for themselves in a business that consistently earns income (versus taking a loss) has the potential to write off business expenses. In addition to the obvious ones like business supplies and other operating expenses, other deductions can be taken ranging from transportation to meals and entertainment, if they qualify. The wealthy are often able to write off such things as lavish meals, as well as the use of their yachts and private planes, helping them essentially pay for these assets the average person can’t even dream of owning.
Hire Their Kids
Another way wealthy business owners can keep more of their money is to hire their own children (for legitimate work) in their businesses. If your child is under 18 and your business is a partnership or sole proprietorship, you don’t have to pay Social Security or Medicare taxes. Additionally, your child’s income won’t be taxed if it remains under a certain amount. Then, you can also deduct their income as just another business expense.
Become Philanthropic
While wealthy people can look generous because of their big donations to charitable organizations, these donations often have a tax advantage, allowing them to write all or part of this money off and lowering their taxable income.
While the wealthy use these tricks to hold onto their wealth, the good news is, for most, the average American can also take advantage, if you have the money to do so.
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