Armed with $80 billion in funding, the IRS will cut back on some of the more than $160 billion in tax revenue that the Treasury Department loses each year because the top 1% find ways to avoid paying their “fair share” payments. In order to earn more, we want to strengthen our compliance this tax season. . ”
The Inflation Control Act, signed into law in 2022, provided the IRS with new funding to hire more staff and modernize its computer systems in order to get the wealthy to pay more. Last September, the IRS posted 3,700 job openings in “high-income and complex tax areas such as partnerships, rather than the average taxpayer with an annual income of less than $400,000” that are “generally focused on auditing.”
So what tactics do the super-rich use to avoid taxes?
It turns out that not only can they afford to hire a tax accountant, accountant, and estate planner, but there are also several tax benefits that cost a lot of money to take advantage of. Here are some strategies only available to the extremely wealthy.
“As long as it's done legally and there's no fraud, I'm fine with it,” said Ed Smith, senior tax and estate planner at Janney Montgomery Scott.
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Important information:Ready to file your taxes? Here's everything you need to know to file your taxes in 2023.
How much do the rich avoid taxes?
The U.S. Treasury estimates that the richest 1% of Americans underpay taxes by $163 billion annually.
How the super rich avoid paying taxes
- basics
- property
- gift
- family office
- investment
- move residence
1. Basics: Some people start with as little as $250,000, but more viable amounts start in the millions.
- Instant income tax deduction Up to 30% of your adjusted gross income (AGI) will be distributed toward your gift, but only about 5% will be distributed for charitable purposes each year. This 5% is calculated from the previous year's assets, so no distribution is required in the first year.
- Avoid high capital gains taxes and increase taxes on your money efficiently. You can deduct the full fair market value of the stock you donate, and you won't have to pay capital gains taxes. If the Foundation sells, it will only pay 1.39% sales tax on the capital gain.
example: Investing $250,000 each year in a private foundation for five years and earning an 8% annual return would yield approximately $1.43 million after excise taxes and the 5% minimum annual distribution to charities. Compare that to $1.38 million if that money was invested in a taxable account and paid capital gains taxes along the way.
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2. Properties: If you own real estate, you can benefit from depreciation. Depreciation refers to how much an asset's value decreases over time due to use, wear and tear, or obsolescence. Depreciation can be deducted from taxable income each year, and is a famous tactic used by former President Donald Trump and his son-in-law Jared Kushner each year to avoid taxes.
The IRS determines how much you can depreciate when you use your business, such as personal property such as cars, trucks, equipment, and furniture, or real property, including buildings and other items built on or attached to the land. We recognize these types of assets. However, land is never depreciated. In 2023, most real estate expense deductions will be capped at $1,160,000. Rental housing can be depreciated over 27.5 years, and commercial real estate can be depreciated over 39 years.
However, there are many different ways to calculate depreciation, and some are more profitable than others in the short term. The basics are:
Straight-line depreciation: The most commonly used method is calculated by simply dividing the asset's price minus its residual value by the asset's useful life. For example, let's say you bought a $220,000 building and rented it out, and the building was appraised at $200,000 and the land was appraised at $20,000. That would allow him to depreciate $200,000 in 27.5 years, or $7,272 per year.
Examining cost segregation: A tax professional or engineer examines various components of a building, such as wiring, plumbing, light fixtures, flooring, and exterior improvements, to determine whether some of them can be depreciated faster. When. For example, HVAC systems, parking lots, carpeting, etc. may depreciate more quickly over five, 10, or 15 years, or may be fully expensed in the first year. This means that there is a large deduction for the first few years, which then decreases as the years go by. Good thing especially when he is unlikely to own the property for 27.5 or 39 years. You can enjoy most of the tax benefits upfront before selling.
Note: Although depreciation deductions are not available for private residences, the tax code includes an exemption for qualified rentals. It states that if a property is rented out for 14 days or less in a calendar year, the income will be tax-free. “It started with the Masters Tournament at the home of the golf course,” said Mark Steber, chief tax officer at prep firm Jackson Hewitt. Augusta residents are known for renting out their properties for tournaments and leaving town for spring break.Some of the larger luxury homes nearby can cost as much as $70,000 a week
“They rent for 14 days, so they don't even have to report it to the IRS,” Steber said, noting that the practice has spread from high-end ski resorts to oceanfront properties. Of course, to do this you must first own and live in one of these homes.
3. Gift:
- Annual gift tax exemption. He was capped at $16,000 in 2022. By 2023, it will be $17,000 per person. “If you have three children and 10 grandchildren, 2x (me and my spouse) would result in $34,000 per year being paid out to all 13 of them from your estate, making it a tax-free gift.” said David Handler, a partner in the Trusts and Real Estate Practice Group.Kirkland & Ellis Law Office
- Lifetime gift tax is exempt. This is separate from the annual gift. For 2023, that amount would be $12.92 million (or $25.84 million for her if married), and this amount generally increases each year based on inflation.
Note: The Tax Cuts and Jobs Act of 2017 doubles the lifetime gift tax amount through December 31, 2025. Unless Congress extends the law, the amount will revert to its previous amount of $5 million, adjusted for inflation.
4. Family office: Typically, you need at least $100 million in assets to set up a single-family office.
Properly structured, it can offer personalized services such as investment management, financial planning, estate and tax planning, philanthropic investing, and concierge services for families with all the tax benefits of a business. Individual taxpayers are prohibited from deducting investment, accounting, tax and similar advisory fees until 2025, but family offices may be able to claim the deduction.
“Very wealthy families can get by if everyone in the family agrees, makes it a business, and deducts the non-deductible amount,” Smith said.
Bonus: If your children have skills that can be used in the family office or other business, you can hire them and pay them a high salary, which is then passed back to them as an expense to the business, says Smith. he said.
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5. Investment: According to Salary.com, the average salary for a chief executive officer in the United States as of January 26 was $812,100. We often hear that CEOs make millions of dollars a year, so how does this happen?
The top 1% derive most of their income from investments, as opposed to the 99% who derive most of their income from wages and salaries. From their jobs, they may receive deferred compensation, stocks and stock options, and other benefits that are not immediately taxable. Outside of work, there are more investments that can generate interest, dividends, capital gains or, if you own real estate, rental income.
As we saw in the real estate section above, real estate investments have other benefits because they are depreciable and can be deducted from federal income taxes. This is another tactic used by wealthy people.
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6. Change of residence:
“Jake Paul has promoted this program to a whole new group of people,” said tax attorney Adam Brewer.
Brothers Jake and Logan Paul, who are also social media personalities, moved to Puerto Rico in part to escape high taxes in the United States.
Puerto Rico is particularly attractive. Because if a U.S. citizen becomes a bona fide Puerto Rican resident (merely relocating does not count), he or she can maintain U.S. citizenship and avoid U.S. federal income tax on capital gains, including U.S.-source capital gains; This is because you can avoid paying your income. Taxes on interest and dividends from Puerto Rican sources.
Typically, U.S. taxpayers must renounce their citizenship or green card to receive federal tax benefits.
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However, not everyone is ready to take that leap.
“A lot of people are moving to avoid state income taxes,” Brewer said.
In particular, the Tax Cuts and Jobs Act limits state and local taxes that can be deducted from federal taxes to $10,000 until 2025, so high earners can benefit from no income tax. This cap returns unlimited state and local tax deductions.
States with no income tax:
- alaska
- florida
- nevada
- new hampshire
- south dakota
- tennessee
- texas
- Washington
- wyoming
Can we get the rich to pay more taxes?
These are just a few examples of how the ultra-wealthy can legally avoid taxes. President Joe Biden proposed implementing a national wealth tax when he took office, but that didn't materialize, and some states are now trying to impose their own taxes.
California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington have introduced proposals to tax the wealthy. Each state has its own approach, but typical strategies include taxing assets and lowering inheritance tax thresholds.
Medora Lee is USA TODAY's money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday to Friday morning.
