The last blog post was titled; Are you a member of the top 1% club?
This blog post answers the question; if you are one of the lucky 1%, how do you avoid paying federal income taxes?
Though it would be advisable for the most fortunate of us to visit a tax attorney (of which thankfully I am not), below are some ways the richest Americans lower or eliminate their federal tax liability.
To Avoid Federal Taxes, Leave the Country
If you are wealthy (or a member of the top 1% club), and no longer wish to pay U.S. taxes, you can go through the process of renouncing your American citizenship and move out of the country. Though the act of, “Renunciation of U.S. Nationality Abroad” is a fairly simple process, renouncing your citizenship may not eliminate your tax obligations.
If you meet certain asset criteria, you may have to pay a U.S. Exit Tax or the Expatriation Tax. This tax is based on several things and is calculated as if all your assets are sold on the day before you left the U.S. and then reported the capital gain. Currently, that net capital gains rate could be as high as almost 24%
The U.S. Exit Tax
Despite the U.S. exit tax, the tax doesn’t appear to have discouraged many who desire to move away from the U.S. In 2017, 5,133 Americans renounced their U.S. citizenship. This number was down slightly from the previous 2016 year when 5,411 did so.
The year 2016 was a record for Americans renouncing their citizenship and leaving the country. This number has been growing each year, except for the small recent decrease in 2017.
A few of the more famous ex-Americans renouncing American citizenship have been; Yul Brynner (actor), Kenneth and Robert Dart (businessmen), T. S. Eliot (writer), Christina Onassis (businesswoman), Earl Tupper (businessman, Tupperware), Tina Turner (musician) & Eduardo Saverin (Facebook co-founder).
Many ex-Americans end up making their home in low-tax countries such as Singapore, where the top tax rate is only 22%.
But these ex-Americans need not fret too much. They can always return to the U.S. and buy a home. Foreign buyers now compromise over 10% of all U.S. home sales. They can then move into their new home and live in America for as long as 6 months on a visitors visa.
Reduce Federal Taxes by Creating a Trust
To avoid current taxes or estate taxes when one dies, many people create trusts. Though much too complicated to discuss here, there are many types of trusts. Trusts with names like a GST-Exempt Trusts, GRAT’s, CLAT’s and QPRT’s all provide a way to shield income from taxes and shield assets from estate taxes when one dies.
Trusts generally allow individuals or families to “keep” the monies and assets in a trust, while distributing the income (both taxable and non-taxable) to the beneficiaries of the trust. Should one or more of the trust beneficiaries die, the trust will usually continue to generate income and wealth for the future generations of the deceased.
Wealthy families like the Rothschild’s, the Kennedy family, and the Hilton’s have all created trusts, both for charitable work and family wealth continuation. Most trusts however, are kept very private. A quick Internet search will not reveal many names who admit to having trusts.
Charitable Trusts and the Top 1%
Trusts are a way for the wealthy to pay minimal taxes while continuing the family wealth beyond the grave. They are also a tool for the wealthy to organize and distribute wealth to charities. Charitable trusts funded by the wealthy have done much to assist and promote the arts and humanities, and to help the poor, sick and needy of the world.
Well known charitable trusts such as the Bill & Melinda Gates Foundation, the Howard Hughes Medical Institute and the Andrew Mellon Foundation are but a few of the charitable foundations and trusts created by the wealthy to continue their own favorite charity works well after they are gone.
Reduce Taxes By Making a Small Salary
U.S. Federal Tax Law is based on earned income, not assets owned. Therefore, one could own assets in the tens of millions of dollars (a home, non-dividend paying stocks, tax-free municipal bonds) yet pay no or minimal federal taxes.
One may be very rich in assets (like Amazon founder Jeff Bezos) but receive a “low” annual salary. Mr. Bezos receives a taxable salary of $1.7 million per year. Assuming this is his only earned income (Amazon stock does not yet pay dividends), his annual income tax burden would be less than $700,000. His net assets, however, are estimated to be well over $100 Billion.
Reduce a Federal Tax Burden by;
- Investing in tax-free Municipal Bonds
- Making qualified charitable donations (though limited)
- Contribute to retirement accounts (limited amounts allowed)
- Invest in capital items and business ventures (when sold, the capital gains tax is lower than the tax rate for earned income)
There are other ways to legally reduce ones federal taxes. Note that trying to reduce ones tax liability (tax avoidance) is legal. However, tax evasion (not paying taxes owed) is not legal and highly discouraged.
Some say that the wealthy may not be paying their fair share of taxes. But most American taxpayers, including the poor, middle class and yes, the wealthy, are simply taking advantage of the many ways to legally reduce ones taxes.
However, should anyone wish to pay more in taxes than what they legally owe, they can make a voluntary gift to the U.S. government by clicking here.
Lastly, when conversations turn to, “taxing the Millionaires and Billionaires“, remember that;
It is estimated that if the government confiscated ALL of the richest 1% ASSETS (not just their income), the amount would be $4 to $5 trillion.
Though certainly a lot of money, the amount would only fund the U.S. budget for a little over one year. Not exactly a long-term solution to a long-term tax revenue problem.