Taxes, suck but most of us have to pay them. In recent years, it has been known that the rich have found loopholes that help them avoid taxes. This by many seems like a very impossible tax that only people with an uber amount of cash can accomplish. But that’s not necessarily true. I’m writing this article to provide you with 5 ways the rich avoid paying taxes and then provide ways the median American can accomplish this. One of the best ways of taking advantage of this if you are in the middle class is to open up an LLC. So, keep that in mind when you are going through this article.
Though being rich and being able to hire support can make this easier. Regarding that, I will say that it’s still possible even if you don’t have that help. That’s the point of this article. With all that said, let’s get to it.
Charitable donations are one of the most common ways the rich avoid paying taxes. But you might be wondering how all this works. Because it’s great you are not paying taxes but you are also giving money away. With that said how do you get to enjoy that money and why does not paying those taxes to matter? That’s a fair assessment. Let me explain.
In short, donating to your favorite charity provides you with a type of tax credit. Called a Tax Deduction. Tax-deductible donations can reduce taxable income. How it works, is let’s say you donate $5,000. When you donate that $5,000 you get that amount in tax-deductible income. So, let’s say you make $75,000 you can subtract $5,000 from that. With that math, the government will only tax $70,000 of your income/revenue.
That pretty much sums it up. It can get a little bit more complicated but I’m not going to get into that here. If you are interested in learning more here’s a quick resource for you.
This is my personal favorite. I don’t know if it’s because I love art or that it’s super interesting how this works. Artworks about the same way as charitable donations work. The way it was explained to me if you have a piece of art and you have it appraised for a certain value you now own that asset (the art) at that value. If you decide to donate it you get that specific amount as a tax-deductible.
Again, back to the example that was provided earlier in charitable donations. If you get that art appraised for $5,000. You donate that to an art exhibit or an event. That organization you gave the artwork to will provide you with that receipt (after you show them the appraised value). From there you can write that you did that in your taxes and you now have $5,000 worth of tax-deductible against your income/revenue. Again, this is just a simplified explanation for this and there is more to it.
Because you can even take the appraised value from one year to the next and hold that against your taxes as well. Like if in 2020 the art you appraised was worth $10,000 and then in 2021, it was appraised for $5,000. Then you can show that you lost value in your net worth by $5,000. Which you can report as a loss on your taxes for 2020.
Increase Equity Exposure and Manage Gains
Another way to look at this is called capital gains exposure (CGE). In simple terms, what that means is if your stock or asset increases in value you will most likely have to pay taxes on it. Very similar to the art scenario earlier, except the other way around. But remember the key to investing here, if you don’t sell it you don’t pay taxes on the assets.
With that said, in regards to the increased equity exposure part, you want to have longer-term assets. If you have revenue and profit coming in you need a place to put it. That can be either real estate, art, donating to a charity, or even the stock market. Now, if you hold on to those assets longer than a year you go from getting taxed by the short-term capital gains rate to the long-term capital gains tax.
Another way this helps you from a tax standpoint is if you spend all your profits on real estate, stocks, etc. You have no income to tax. That’s where understanding the difference between revenue and profits is important.
The best part about all of this is everything is connected to each other. What I mean by that is to think about the previous 3 topics here and then apply them to this. Some of the ways the rich are able to manage their assets are by starting a corporation (LLC, C, or S Corps). They invest in stocks, bonds, or real estate. They max out their Retirement accounts, claim tax credits, etc. A lot of those things are stuff that the average person can do.
As a low to median income person, you can open up an LLC through LegalZoom for around $150-$400 (depending on what state you are located in). You can open up a Roth IRA, Traditional IRA, and brokerage account. From there you just commit to dumping $500-$1000/month to investing and slowly build those assets. It’ll take longer because you don’t have the money yet but if you will if you commit to it long term. It’s a simple plan that just about anyone can do. You just have to commit to it.
Real estate is probably one of the best and easiest items to pick up from the list of stuff discussed in this article. Because of that, I’m not going to go into too much detail about it here. The rich put their money into real estate, one for the value of the property, and two it’s the easiest way to get their money to work for them. Some of the ways you can take advantage of this are you can partner with a few of your friends and put money down on a duplex or a condo.
Before you do that remember to make an LLC for yourself and make sure your friends do the same. From there, your LLC and your friends LLC can work together to own the property. This helps split the difference of cost for property and gets you in the game. Getting in the game is the most important part. It’s also a lot more fun.
Those are 5 ways the rich avoid paying taxes. I hope this was helpful. This is not an exhaustive list, but it’s a good start. As a resource, I’ve included the IRS tax code here. Not the most colorful of reads but it at least is something to reference. In order to understand how all these works is to start playing the game. You can read all you want, but it won’t make much sense unless you are actually playing the game.
Check out my other wealth articles here!