Even if you have the best tax accountant, it’s likely that you pay at least a little tax each year. This being the case, it can be maddening to hear that billionaires like Jeffrey Bezos and Elon Musk have had years in which they’ve paid not a single cent in income tax.
If you’re curious as to how the ultra-wealthy avoid paying taxes, we’re about to spill five of their secrets:
1. Their wealth is tied up in stocks
Forbes keeps a running estimate of Bezos’ wealth, which is currently sitting at US$192.4 billion (and counting). Of this incomprehensible total, around US$170 billion is accounted for by Amazon stocks.
When it comes to stocks, you don’t pay any tax until you “realize” the wealth by cashing out, even if your holdings jump up by a massive amount.
While the stocks do represent value, they cannot be used as tender, so gains aren’t counted as income.
2. They get to have their proverbial cake and eat it too
If someone like Bezos or Musk needs cash they can spend, selling stocks is actually an inefficient way of accessing funds. Instead, they’re able to take out loans against their stock holdings.
Under the shadow of their towering fortunes, these loans come with interest rates so low that they equate to less than what the billionaires would pay in capital gains tax if they cashed out their stock.
So, they get to keep their stocks, enjoy as much liquidity as they want, and avoid any tax burden from it.
3. Tax havens are a billionaire’s best friend
By registering a business in a country with low tax rates and lax tax laws, or even just keeping your money in an account there, you can drastically reduce your tax burden.
Popular tax havens include the Cayman Islands, Switzerland, and Bermuda. Even the US and Canada can be tax havens, just not for the locals.
Certain foreign tax laws make these North American countries ideal tax havens for the super wealthy in Asian countries.
4. They play shell games with shell companies
A shell company is kind of like a movie set. It looks like it does what it says it does, but really it’s all for show.
Shell companies look like normal businesses. However, they don't produce or sell products, they don’t hire employees, and they don’t even generate revenue. All they do is engage in transactions and store money.
Shell corporations are a great way for wealthy people to take advantage of loopholes in the law and create tax havens for themselves. However, they can also facilitate money laundering and other illegal activity.
5. They buy yachts
That’s right – those yachts aren’t just for show. If you fit out a yacht to have all the comforts of home and spend at least two weeks out of every year living in it, then you can claim it as your second home for tax purposes.
Among other things, this means any profit from selling it will be taxed at a lower rate, and the owner may rent it out for two weeks a year without having to claim it as income. Use the yacht for business and you open up a whole new world of tax benefits.
So there you have it – five of many ways the super-rich manage to avoid paying taxes. Sadly, you need to have a certain amount of wealth already accrued to take advantage of most of their methods. However, it’s still interesting to get a glimpse into their world!