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HOW THE RICH HIDE THEIR MONEY AND PAY NO TAX - YouTube
Channel: Practical Wisdom - Interesting Ideas
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would you believe me if I told you that
Warren Buffett pays less tax than his
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secretary you may wonder how a
billionaire pays fewer taxes than an
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average income earning secretary and the
answer is that there are two kinds of
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taxpayers those who accept taxes as a
natural part of life and pay whatever
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the government tells them to and there
were others who do everything in their
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power to avoid paying taxes let's give
each of these types of people a name we
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will call the willful taxpayer Paul and
the tax avoider Jack to Paul when the
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government comes knocking at the end of
the year he doesn't see it as a big deal
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earning $40,000 a year
Paul hands over his $15,000 worth of
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income taxes and moves on about his life
sure he would love to keep more of the
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$15,000 but he sees paying taxes as a
normal part of life jack on the other
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hand is a medium-sized business owner
who draws himself a salary from the tech
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company he owns and built from scratch
jack has over 50 employees working for
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him and has seen his business grow
year-over-year unlike Paul Jack despises
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tax he thinks to himself how can the
government who played no part in making
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his business's success take such a huge
chunk of his money for nothing to make
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matters worse being taxed personally and
by being a business owner jack is
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subject to just about every tax
imaginable such as personal income tax
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sales tax excise tax property tax and
investment tax with all these potential
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taxes being applied to his income Jack
decided to look into how big
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corporations avoid paying taxes after
hearing that in 2018
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Amazon paid zero income tax even though
they earned over two hundred billion
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dollars in revenues that year determined
to avoid losing a sizeable chunk of his
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earnings to tax Jack looked into ways he
could cut down on the amount of
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corporate tax his business pays and
reduce his own personal tax bill in his
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hunt for tax strategies Jack came across
the following techniques method number
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one riding off expenses given that most
rich individuals earn their fortunes
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through a business this gives them the
opportunity to write off expenses and
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their taxable income you see most
expenses you occur in your day-to-day
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business operations can be written off
against your income to lower your taxes
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payable for example let's say you run a
digital marketing agency and are in
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$200,000 a year in revenues if you had
no expenses then the whole $200,000
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would be subject to tax however as most
businesses incur expenses these costs
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will reduce what amount of profits will
be subject to tax for instance if you
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have $100,000 worth of legitimate
business expenses a year then this would
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make your annual profit $100,000 instead
of the $200,000 you earned in revenue
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which would cut your taxes paid on your
earnings by more than half
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eligible expenses can include things
like business meals office supplies new
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laptops internet connections etc
employee benefits staff training rent
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and leases car expenses etc as the owner
of the business if you decide to take a
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trip for a conference to develop your
skills in digital marketing you can
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decide to write that off as well
again this method of reducing your taxes
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is only enjoyed by people who own
businesses leaving little wonder as to
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why most people who own businesses seem
to be considerably richer than people
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who work as employees method number two
diverting income as of 2017 the United
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States corporate income tax rate was
reduced from thirty five percent to
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twenty one percent and while this
offered many companies Amazon included
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the opportunity to significantly reduce
their income tax payable many companies
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still elect to recognize their income in
countries with even lower tax rates for
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instance the Cayman Islands has no
income tax no corporate tax no estate or
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inheritance tax and no gift tax or
capital gains tax making it a pure tax
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haven in short whatever you earn you
keep of course without any calculations
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it is obvious that this is the
significant savings to any business who
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can realize their income overseas but
just how much would this save you if you
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had set up a tax haven in this country
let's say your business earned five
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million dollars last year instead of
paying an income tax of thirty five
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percent for 1,750,000 dollars you would
instead pay nothing and keep that almost
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two million dollars for yourself besides
allowing you to realize income tax free
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the Kane
have very strict banking laws designed
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to protect banking privacy the country
does not have any tax treaties with
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other nations
thus guarding the finances of its
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offshore banking clients from the tax
authorities of other countries
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moreover offshore corporations in the
Caymans are not required to submit
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financial reports to any Caymans
government authority an incorporation in
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the Caymans is a very simple streamlined
process with all these benefits
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it's no wonder companies are flocking to
these remote destinations to hide their
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earnings method number three netting
revenues against losses if you've ever
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looked at the stats in favor of starting
a business then you will know just how
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bleak they can be the numbers show that
20% of small businesses fail in their
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first year
30% of small businesses fail in their
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second year and 50% of small businesses
fail after five years in business
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finally 70% of small business owners
fail in their tenth year in business
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with the chance of success in business
being rather low there are still
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numerous companies that succeed and make
a fortune
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for which they need to protect and one
of the ways they do this is through the
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use of loss carryforwards you see most
businesses require a few years in
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operation before they start turning a
profit and in the years where business
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is not exactly booming losses are bound
to be incurred these losses while
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unfortunate at the time are excellent
tax avoidance tools for future periods
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you see like expenses loss carryforwards
can be netted against your earnings to
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reduce your overall taxes payable
meaning that less of your income is
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subject to tax method number for issuing
stock options another way businesses
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reduce their taxes is by issuing stock
options to its stake holders this method
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is particularly convenient for
businesses for two reasons number one it
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is booked is an expense which will
reduce profits and ultimately the amount
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of money that is subject to tax
and number two it does not result in a
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cash outflow for the business
you see when stocks are issued they are
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booked as an expense for accounting
purposes but no cash changes hands this
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means that the company can reduce its
profits through the expense and maintain
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a strong cash position
moreover companies that use this
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strategy gain the benefits realized by
incentivizing their shareholders to
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further increase the stock price if you
own stock in the company you worked for
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wouldn't you put an extra effort in
order to make the company's stock value
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rise so that you could cash out your
options for more money with these four
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corporate tax strategies in mind jack is
starting to feel more confident that he
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can reduce or eliminate his corporate
tax bill but he knows that he needs to
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withdraw some income from his business
in order to live and once that cash to
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be minimally taxed so he decides to
switch gears and look into ways he can
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reduce his personal tax owing method
number five leveraging geographical tax
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laws for the past 20 years jack has
grown his business in the heart of
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Silicon Valley however his patience with
living in the state with the highest
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income tax rate in the United States has
finally reached a tipping point with the
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state income tax rate of 13.3% for the
highest income earners Jack is seeing a
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large chunk of his income being handed
over to his state government with even
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more being passed along at the federal
level while federal taxes can't be
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avoided
Jack wonders what he can do to avoid
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some of the other taxes he is being
subject to that are eroding his personal
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wealth
Jack began researching other states with
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lower income tax rates and was surprised
to see that 7 states were income tax
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free such as Texas Nevada and Florida
meaning that he could save the 13.3% tax
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he was currently paying and still enjoy
the warmth of the Sun all year long as
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Jack began looking into housing options
in each of these three states he
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wondered if there were other ways he
could further reduce his personal tax
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bill method number 6 investing in real
estate part of the reason the rich
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continue to get richer is that they make
their money work for them and one of the
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ways they do this is through real estate
you see not only does owning real estate
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increase your wealth by generating
income but it also allows for the
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reduction in taxes payable when you buy
a property you are requiring a
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depreciable asset and because the asset
reduces in value over time from an
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accounting perspective you are able to
deduct depreciation and reduce the
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amount of income that is subject to tax
common deductible expenses include
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repairs to the property and mortgage
interest and the more money you spend on
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expenses the more you can reduce your
tax selling however once a property is
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fully depreciated what do you do you
sell that property and buy a new one
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while selling property usually triggers
tax there is such a thing as a 1031
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exchange which allows you to defer the
tax you
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paid on selling the property if you buy
a new property within 60 days of sale in
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essence you can continue to depreciate
your properties and then sell them in
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perpetuity and never pay the tax while
still being able to use the assets to
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generate rental income method number
seven deferring income while Jack has
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looked into moving states and using real
estate to reduce his taxable income he
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still feels as though some of his income
will need to be sheltered for tax and
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another way he can do this is by
deferring his income the most common tax
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deferral vehicle is an individual
retirement account or an IRA which
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allows you to move your income into a
fund and subject your earnings to tax at
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a later date if you're an employee you
probably use this type of account to
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hold your savings and allow them to grow
over time
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however they also double as a solid tax
avoidance strategy you see income earned
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from employment is subject to tax unless
that is you contribute the funds to your
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IRA account in the year you contribute
money into your IRA you will receive a
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deduction from your taxable income or
the amount you contributed this strategy
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is particularly effective for
high-income earners because it reduces
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their tax bill during their highest
earning years for instance if you earn
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five hundred thousand dollars a year and
are in the highest tax bracket your
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income is probably being subjected to
tax of up to 40% but what if you could
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avoid the 40% tax and instead have part
of your income only be taxed to 20%
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well you can do just that using an IRA
you see when you contribute to your IRA
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you do not pay any tax in the year you
contribute and instead pay tax when you
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withdraw all the funds which is
typically during retirement however
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during retirement
you'll probably be earning much less
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than $500,000 meaning that the money you
withdraw will be taxed at a lower rate
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and the difference in tax rates is how
much you would have saved by using this
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income deferral technique with all these
tax avoidance techniques in your
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financial toolbox
you only have one question left to
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answer which type of tax payer will you
be from here on out a Paul or a jack
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thanks for watching
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