Billionaires legally minimize taxes primarily through a "buy, borrow, die" strategy: holding appreciating assets (stocks/real estate) without selling to avoid capital gains tax, borrowing cash against these assets (nontaxable loans), and passing appreciated assets to heirs, which "steps up" the basis to market value, eliminating decades of capital gains taxes.
We thought Michigan residents might be interesting in learning how Facebook founder Mark Zuckerberg and several company insiders are using a legal tactic called a “grantor-retained annuity trust” to avoid paying hundreds of millions of dollars in estate and gift taxes on their Facebook shares.
Grantor Retained Annuity Trusts (GRATs)
A GRAT is an irrevocable trust designed to shift future asset appreciation to beneficiaries, typically children, with minimal gift and estate tax liability. The grantor contributes assets into the GRAT and in return receives a series of annual payments for a specified term.
They don't need to sell stocks, which would trigger capital gains taxes. Instead, they can take loans against their shares. Securities based lending, securities based lines of credit, home equity lines of credit and structured lending are options for leveraging assets without selling them.
In some years, billionaires such as Jeff Bezos, Elon Musk and George Soros paid no federal income taxes at all. Billionaires avoid these taxes by taking out special ultra-low-interest loans available only to them and using their assets as collateral.
“Tesla: The company has used mechanisms like deferred tax assets, research and development credits, and massive deductions from Elon Musk's stock-based compensation to reduce its U.S. federal income tax to near zero in profitable years.”
There are several ways to transfer property to a child tax-free, including leaving it in a will, gifting it using lifetime and annual exclusions, selling it, or placing it in an irrevocable trust.
Warren Buffett
Buffett is currently worth $136 billion (£107bn). One of Buffett's most famous quotes is about not leaving his vast fortune to his children: "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing".
Googlers call Zuckerberg's approach the 80 percent rule
She calls this idea the 80 percent rule. It states you should schedule only about 80 percent of your days. Leave 20 percent open to absorb whatever craziness comes up.
Jeff Bezos pays a very low effective federal income tax rate, often under 1%, because most of his wealth comes from untaxed stock appreciation, not taxable income like wages; a 2014-2018 analysis showed he paid roughly $1.4 billion in federal taxes on a $127 billion wealth increase (a ~1.1% rate). He has even paid zero federal income tax in certain years (like 2007 and 2011) by using investment losses and deductions, legally deferring taxes on stock growth until sold, which he often avoids by taking low-interest loans against his shares.
Like most countries, the United States has a progressive tax system, so higher-income people pay more tax in total and also pay a greater percentage of their income.
Backdoor IRAs, carried interest, and life insurance are just some of the loopholes you can use to reduce your tax bills. It's important to plan correctly and use the right loopholes, credits, and deductions for your unique situation.
The top 1% are evading $163 billion a year in taxes, the Treasury finds. WASHINGTON — The wealthiest 1 percent of Americans are the nation's most egregious tax evaders, failing to pay as much as $163 billion in owed taxes per year, according to a Treasury Department report released on Wednesday.
The IRS 7-year rule primarily applies to keeping records for claiming a deduction for bad debts or losses from worthless securities, allowing a longer period to file for a credit or refund, but it's not a universal audit limit; it's often a recommended safe buffer for general record-keeping, with the standard IRS audit period usually being 3 years, extending to 6 years for substantial income omission (over 25%) or foreign income issues, and indefinitely for fraud.
One-time forgiveness, officially known as First-Time Penalty Abatement (FTA), is an IRS program that allows qualified taxpayers to have certain penalties removed from their tax accounts.
One of the biggest reasons Bezos pays little in personal income tax is that he doesn't rely on a traditional salary. Instead, he holds most of his wealth in Amazon stock. Here's why this matters: Capital gains taxes are much lower than income taxes in most cases.
“The hardest thing in the world to understand is the income tax.” Albert Einstein hit the nail on the head with this oft-repeated quote. The U.S. Tax Code is long, complex, and ever-changing. This is especially true for people with higher incomes, changing life circumstances, and families to consider.
Amazon CEO Jeff Bezos and Tesla CEO Elon Musk, for example, are the two wealthiest people in the world, according to the Forbes Billionaires' List. But in 2007 and 2018, Bezos didn't pay a dime in federal income tax, even though he was already a multi-billionaire. The same was true in 2018 with Musk.
The IRS can generally levy any account in your name for unpaid taxes, but some funds are protected, like certain disability payments or Social Security (though some can be taken), and funds in an irrevocable trust or accounts not directly in your name (like some business or trust accounts) are harder to seize. Certain income sources are never taxed, like some veterans' benefits, child support, and welfare, but these aren't usually held in traditional bank accounts. The key is that the IRS targets your assets for your tax debt, so protecting funds by legally changing ownership or ensuring they are designated as non-taxable income is how they become untouchable by levy.