It is perfectly legal. One you might be able too.
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Just last month it was revealed from an investigation of IRS data by media platform ProPublica that — surprise, surprise — the wealthiest of the wealthy (Bezos, Buffet, Musk, etc.) Over the last 15 years, they did not pay their fair share of income tax. What does “fair share” mean?
The bipartisan Tax Foundation says that the average federal tax rate for all taxpayers, after you take into considerations deductions, credits and exemptions, was 13.3% in 2018. Bezos, in 2017, paid no taxes. According to ProPublica, Elon Musk had a “true” rate of 3.4% and Warren Buffet, 0.1%.
People often question me after a few beers, as I am a certified public accountant. How can these wealthy-beyond-belief men pay almost no taxes at all? These men have billions of dollars, so why should they pay any taxes? They should be contributing their fair share.
Although these questions may seem reasonable, we should not allow our emotions to take over. Let’s first understand how they pay less tax relative to the rest. These are just a few of the many tricks they use. Their greatest weapon is the debt.
They may have billions of dollars in their bank accounts, but that doesn’t make them taxable. We don’t have to pay taxes on stock, mutual fund, and investment account gains. They are unrealized gains. If we were to realize those gains through the sale of those assets, then taxes would be due. Most people don’t pay taxes, or at least not often. The very wealthy are not the exception. Even though Bezos might add billions to his wealth each year, it is not income. It is therefore not taxable.
Because these assets can be used to secure income, they are a good way to get around the income tax. This is what these men do. To fund their lives, they borrow from their assets. Unrealized gains and debt are not taxable. It’s income if a mortgage company offers $300,000. That money is yours to repay. It doesn’t cost you any taxes to receive the money.
The very rich borrow. It could be a few million dollars a year. While that may seem like a large sum to us, it is not much to multi-billionaires. The wealthy take often a salary from the business they own to pay their monthly debts. This salary is tax-deductible. It is taxable, but it is a small amount compared to their increased wealth.
Is the debt ever paid off? It could be. You could pay it off when you die (by that time, no one cares how much the debt is). It’s more likely that it is part of an trust that will continue to be passed on forever to the next generation.
More business owners need to be aware of this. What is the reason? Why? These assets can be either our savings, or they could go against our company’s value. As a result, we might be able to receive less tax.
It’s not my intention to say that we shouldn’t be in control. It’s important to keep things in perspective. Jeff Bezos’s total worth is not dependent on how much he borrows each year. This is not true for many of us. It’s possible, however, that if your net worth is a couple million to a few millions dollars, borrowing $100k for a few year would reduce your tax bills. It’s entirely up to you.
Do you think the system should be changed? Does it seem unfair? Is there a “wealth taxes”? That is up for debate. You should at least be able to see why they don’t “fair share”.
Publiated at Tue, 3 Aug 2021 15:14:21 (+0000).