How The Rich Avoid Paying Taxes - YouTube

Unknown: The more money you make, the more you have to pay

in taxes, right? Well, not always. Here in the US, the more

you earn, the bigger percentage cut the government withholds

from your pay. But here's the thing, the ultra-wealthy

typically take advantage of rules in the tax code, which

enable them to lower their effective tax rate.

The rich are different from you and me, as the old saying goes,

in large part because the sources of their income are

different.

Just take the case of billionaire Warren Buffett. He

often points out that he pays less taxes on a percentage basis

than his other employees, including his secretary. The

reason? Well, most of his wealth comes from his stock holdings,

not his annual salary. The great thing about stocks is that you

aren't taxed till you sell them. And even then, the taxes are

typically lower than the rates on wage income. So if you ask

people, you know, what bothers you most about the tax code,

complexity is a common answer, but also the feeling that the

wealthy don't pay their fair share, or the feeling that

corporations don't pay their fair share. In 2018, Amazon

famously pulled in over $232 billion in global revenue, and

yet, its federal tax bill was $0. And in fiscal year 2020, at

least 55 of the largest corporations in america,

including FedEx and Nike, also managed to pay no federal

corporate income taxes.

There's a great Supreme Court case with Judge Hand many years

ago, that it's not the taxpayers responsibility to pay the most

taxes that he can, it's the taxpayers responsibility to pay

the least taxes that he can. There's even a rule within the

IRS code that if you want to pay more taxes, you can write a

check to the United States Treasury, and you can take a tax

deduction for that.

But some experts say tax breaks are designed to reward the

taxpayers who are helping to pump up the economy.

Individuals who are not again contributors in terms of real

estate and businesses, they don't get tax benefits, but it's

because they are not contributing to the economic

growth at a larger scale.

So how exactly are the country's biggest earners using the tax

code to avoid paying taxes? To understand how the wealthy take

advantage of the tax code, you first have to look at where all

that wealth comes from.

The biggest loopholes arise when you have assets. Most Americans

don't have assets, all they are dependent upon is their income

from their salary from their employer. So if you have someone

who has assets such as business, and real estate, again, they are

unlocking different areas of the tax code that most individuals

do not get to explore.

you can think of someone's wealth as being comprised of

separate assets which fit into one of three different tax

buckets: taxable, tax-deferred, and tax free. If your only form

of income is your annual salary, then all of your wealth just

fits into the taxable bucket. But the rich also tend to

diversify into other types of assets and investments that the

tax code doesn't consider to be taxable income. There are

individual retirement accounts, some of which are not subject to

federal taxes, and then you have investments like stocks that fit

into the tax-deferred bucket. If the value of your stock

portfolio goes up, you don't owe tax on those gains until you

realize that gain, a.k.a not until you sell that stock. And

even when you do so, the tax rate is typically lower than the

rates on wage income.

Capital gains can be avoided in life, and also largely avoided

in death. And so that's highly advantageous to high-income,

high wealth people.

Capital gains taxes also apply to bonds plus tangible assets.

So think things like real estate or cars and boats. And with the

right tax planning, you can time it such that you only realize

those gains during the fiscal year when you have big capital

losses to offset that gain. You can also skip the tax entirely

if you pass that appreciated portfolio onto your heir when

you die. Plus owning property opens up higher earners even

more ways to chop down their tax

bill. If you own real estate, you can now deduct things as

depreciation, real estate taxes, property taxes. Even if you are

not investing in real estate to get rental income, even if it's

your primary residence, you can itemize your tax deductions on a

Schedule A which can also lowerly affect your tax

liabilities. On the other hand, if you do have rental

properties, you can take advantage of depreciation your

expense related to your real estate properties and earn some

extra income while paying minimal tax on that additional

income that you are earning.

And these strategies are just the tip of the iceberg. There's

a whole patchwork of ways that can drive

down that annual tax bill. There's not some magic deduction

or magic credit that people overlook and once I tell you,

you're going to get a $10,000 refund, what there is a myriad

of rules, opportunities and options to lower your taxes.

I'll give you a simple example. There's almost 12 different tax

breaks for higher education, whether it be the tuition and

fees deduction, 529 plans, where you can put money in an account

and have it grow tax free.

Borrowing against the value of real estate or borrowing against

the value of insurance policies. For example, you can take out a

life insurance policy with a high cash dividend, and then

borrow against that from a bank. The bank sees that as an actual

asset and may loan up to 90% of the value of that life insurance

policy. That loan is effectively income to you. But in the tax

code, it's not considered income or a capital gain. So it's tax

free. So there's these kinds of techniques that can be used if

you have a lot of income and a lot of assets, they are just not

available to ordinary people that don't have that kind of

disposable income.

In 2013, many time Grammy winner Lauryn Hill was sentenced to

three months in prison, three months of home confinement, plus

a $60,000 fine for not reporting more than $2.3 million in

income. She isn't alone. Some of the biggest names in Hollywood

have had serious run-ins with the IRS for failing to pay their

fair share of taxes. To be clear, these are all examples of

tax evasion, which is illegal, not to be confused with tax

avoidance, which is legal, even if it is deemed unfair by large

swaths of the population

Tax evasion is illegal and is actually punishable for up to 5

or 20 years in prison.

And the law is pretty black and white. There may be some new

greyness on things like cryptocurrency, you know, and

other new innovations in the world. But most of the time you

know it when you owe it. And I can certainly tell whether you

owe taxes or not on a situation. But when people come in with

fabricated dependence, you know, made-up deductions, phantom

partnership losses, that's when you get into invasion and

evasion's the line crosser.

Those sophisticated tax strategies that we just talked

about, they are all totally legal ways to avoid paying more

taxes than you

absolutely must. Tax avoidance, on the other hand, is utilizing

the tax code to benefit you in the way that is legal. So if

there is a deduction for you having a dependent, or you being

able to expend something through a business, as long as you're

following the tax code in the guidelines, you can take these

tax positions.

Thanks to lax enforcement by the IRS, tax avoidance by the top 1%

of taxpayers could exceed $5 trillion by 2029, according to

former treasury secretary Lawrence Summers. This same

report found that the top 1% account for about 70% of

underreporting. So why is it that the country's top earners

also tend to be pros in the arena of tax avoidance? Experts

tell us a lot of it comes down to tax planning.

Wealthy individuals tax plan, most Americans don't have a tax

plan. And a tax plan is going to encompass the CPA or tax

accountant to go into the new stimulus package or new tax

reform and actually look at how they can use the new changes in

the code to benefit their clients. These wealthy

individuals have that guidance throughout the year to get them

to a more reasonable position by year-end.

A tax loophole is a provision in the tax code that allows people

to reduce their taxes to a point below that intended by the

lawmakers. In other words, it's a technicality that lets the

filer avoid a law without directly violating it. Not

everyone likes the connotation.

Yeah, loophole is kind of a bad word. You know, I'm not even

sure what loophole means because it's either legal or it's not

legal. And if it's legal, then it's not really a loophole. I

would put forth it's a best practice.

And what I would tell you some of the best practice, not just

high income earners, but any smart savvy taxpayer is to take

advantage of all the tax rules in the law. Once embedded in the

tax code, it's pretty difficult to get rid of a tax loophole.

Each one not only benefits somebody by saving them money in

their taxes, but it also typically has an army of

lobbyists backing it up.

Sometimes they're not partisan, because they are more about

protecting a given economic sector, or even specific

businesses. And that has to do more with the locale. It might

be more about what parts of the country, what states, what

congressional districts have a certain economic sector that's

very important,

Essentially, the US tax system creates an incentivized system

for those who aspire to achieve wealth. And here's why. You get

tax credits for having a business or having real estate.

In that act, you are creating opportunities to employ people

or creating opportunities to house people. Unemployment and

homelessness are two of the major concerns for any

government. So why not give tax incentives to those who are

going to assist in creating a way to aid these issues? So if

you close out tax loopholes and tax incentives, we don't know

what the outcome would be, because this can potentially

discourage individuals who are contributing to the vast growth

of our economy to not make those contributions at a more

accelerated rate.

Despite the quagmire of opposition, the question as to

whether or not to close loopholes often pops up in

elections and with new administrations. Just take the

Biden White House, the President is taking aim at some pretty

popular loopholes in the tax code. Though it remains to be

seen whether he'll succeed