Jaspreet Singh: How The Wealthy Pay No Taxes — Learn Their Secret
Written by
Daria Uhlig
Edited by
Cory Dudak
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How you make your money has a major impact on how that money is taxed. Whereas 99.9% of Americans get most of their income from wages, according to an analysis from The Brookings Institution, the wealthiest 0.1% get the bulk of theirs from investments and businesses, which have more favorable tax rates and allow the wealthy to leverage debt. And that, Jaspreet Singh said in a recent video, is key.
While Singh has advice anyone can use to pay less taxes, business owners — including those who work a side hustle as an independent contractor — will reap the most benefit from his system for avoiding taxes like the wealthy.
Lower Your Tax Rate
“If you made $100,000 and you went to an accountant and you asked them, ‘What is the tax rate going to be on the $100,000 worth of income?’ the first question that they’re going to ask is, ‘How did you make this money?'” Singh said in the video.
Ordinary wage income is taxed at the highest rate and has the fewest deductions. Long-term capital gains from investments and rent checks you collect from from rental property are taxed at a lower rate and have more deductions. By “recategorizing” your wages with passive income or business income from a side hustle and long-term gains from investments, you can reduce your tax rate and pay less tax.
Lower Your Taxable Income
Most W-2 workers take the standard deduction on wages earned at their jobs and pay taxes on the rest. Gross wages minus the tax you pay is what you have to live on. But if you own a business, whether it’s a real estate investment business, a side gig you created or a business that you bought, “this is completely flipped,” Singh said.
“You make money from your business, then you pay your expenses… and then you pay taxes on whatever is left.”
Use Debt
The wealthy use debt to their advantage. Singh explained how.
Elon Method
Elon Musk famously tweeted, “I do not take a cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock.” That, of course, would create a lot of taxable income. Debt, on the other hand, isn’t taxable, and Musk can use it to fund his lifestyle by borrowing against his shares.
As his companies’ value grows, so does the amount Musk can borrow against it to refinance his debt and borrow even more money — as long as the businesses grow fast enough to stay ahead of the interest that accrues on the debt.
Buy bigger deductions
Another way to leverage debt is by financing deductible business expenses instead of paying cash for them. If, for example, your Uber side hustle makes $25,000 in profits and you need a new car that costs $25,000, financing the purchase lets you keep the $25,000 in cash from your business profits and still take the whole $25,000 deduction.
Don’t Try This Without an Accountant
Singh emphasized the importance of working with a good accountant, not only to ensure that you get all the deductions you’re entitled to, but also to help you understand the risks and rules associated with leveraging debt to reduce your taxes.
“Anytime you use debt, you increase the risk — You increase the risk of you failing, you increase the amount of expenses that you have because now, no matter what happens, even if your business starts to struggle, you’ve still got to make your debt payments,” Singh warned. “I personally don’t do these strategies,” he said.
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