Unconventional Tactics Employed by Billionaires to Reduce Tax Burden

While billionaires are required to pay taxes like everyone else, they often have access to more resources and specialized knowledge to help them optimize tax expenses or avoid taxes altogether. Shockingly, estimates from the US Department of the Treasury suggest that the richest 1% of Americans avoid paying taxes on an astonishing USD 163,000,000,000 every year. The super-rich avoiding taxes is hardly a surprise, yet the logical question arises, why don’t billionaires pay taxes?

Billionaire taxes

What are the billionaire tax loopholes?

How do millionaires avoid taxes? This is a one-million-dollar question.

When it comes to tax optimization, billionaires often use a variety of strategies and tools to reduce their tax burden or avoid taxes:

  • establishing charitable foundations
  • making gifts
  • setting up family offices
  • investing in tax-advantaged assets
  • changing residency
  • utilizing retirement accounts
  • leveraging losses.

While it’s true that billionaires have a wider array of opportunities to minimize their tax liability or avoid taxes compared to those with lower incomes, there are still some tactics and strategies that can be used by the latter to reduce their tax burden.

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Unlocking the advantages of charitable foundations: how the rich pay less tax

For billionaires, establishing numerous charitable foundations is nothing out of the ordinary. This, however, necessitates a significant amount of wealth. While some affluent Americans start with USD 250,000, it’s preferable to have millions. By utilizing charitable foundations, billionaires can avoid taxes or at least minimize their tax burden, ultimately boosting their wealth. Upon transferring funds to such structures, they may claim a 30% tax deduction on contributions made throughout the year. However, they are also required to spend a minimum of 5% of these funds annually on charitable causes. During the first year as a foundation contributor, such expenditures are not mandatory. 

By transferring their stocks to a charitable foundation at market value and bypassing fiscal obligations, billionaires successfully avoid large taxes on capital gains. With the foundation selling the stocks, only a mere 1.39% tax is applied to the profits.

For instance, if a billionaire invests USD 250,000 annually into a foundation for 5 years and receives an 8% return each year, they could end up with about USD 1,430,000 after taxes and a 5% charitable contribution. If the billionaire had instead invested those same funds into a regular account and paid taxes on capital gains from stock sales, they would have accumulated only USD 1,380,000.


The act of giving gifts to loved ones or friends without receiving any compensation, whether material or immaterial, is a regulated process governed by tax rules to prevent any fraudulent activity.

In the United States, the annual limit on gifts is constantly being reviewed. In 2022, it was set at USD 16,000 per person but then raised to USD 17,000 in 2023.

One strategy to minimize inheritance taxes is to utilize gifts, and here’s an example. Let’s say there’s an elderly couple with 2 children and 4 grandchildren. They can each give USD 17,000 per person (totaling USD 34,000 per couple) without incurring any gift tax. In total, this results in a reduction of taxable income by USD 204,000 per year. The said gifted funds are not considered part of the estate and are therefore exempt from taxation.

In the US, there is also a concept of a lifetime limit on gifts (a.k.a. lifetime gift tax exemption) that is separate from the annual limit (a.k.a. annual gift tax exclusion). As of 2023, an individual can gift up to USD 12,920,000 to

one or more recipients throughout their lifetime without incurring any taxes. If the individual is married, this exemption is doubled to USD 25,840,000.

Family offices

To set up a family office, you should have at least USD 100,000 in assets.

These offices provide tailored services, such as investment management, financial planning, tax planning, estate planning, charitable investments, and more. Family members can access these services, and the expenses incurred by the family office may be tax-deductible. Although US tax law generally disallows deductions for investment advisory fees and certain other expenses, the above rule does not apply to family offices. This makes them an attractive option for wealthy families seeking to manage their wealth effectively and avoid extra expenses.

Billionaires can take advantage of their family office by using it to provide employment opportunities for children and other family members. This allows them to pay their relatives a high salary, which can be a tax-efficient way to transfer wealth within the family. Under the IRS regulations, payments for the services of a child under the age of 18 who works for a parent’s trade or business are exempt from social security and Medicare taxes. This exemption applies to sole proprietorships or partnerships where each partner is the child’s parent.

Additionally, children’s income may be exempt from taxation if it falls within the standard deduction limit. As of 2023, the said limit is set at USD 13,850.


Billionaires primarily earn their income from investments, which grants them access to a range of tax advantages. This includes lower tax rates on passive income sources such as interest, dividends, royalties, and other forms of investment income, as compared to traditional sources like wages.

In the United States, the tax rate on earned income can go up to 37%. However, long-term capital gains (from investments in securities, real estate, and other assets) are subject to significantly lower fiscal rates ranging from 0% to 20%, with the exact rate depending on your income size.

Go ahead and learn what the most popular ways to invest are. 

Change of residence

To mitigate the impact of taxes on their income or under the best-case scenario avoid taxes altogether, affluent individuals may resort to a strategy called “residency change.” This entails establishing a center of personal and financial interests in a jurisdiction that offers a more favorable tax regime.

For instance, many Americans opt to relocate to Puerto Rico. By doing so, they can maintain their citizenship and avoid paying federal capital gains tax on their investment returns, including those generated in the US. Additionally, interest income and dividends derived from sources in Puerto Rico are not subject to fiscal obligations.

FYI: here’s what you should know about dual tax residency and the benefits thereof.

Pension and insurance accounts

In many countries, there are retirement savings accounts available for individuals to use. In the US, these accounts are referred to as Roth IRAs, in Canada, they are called Tax-Free Savings Accounts, and in the UK, they are known as Individual Savings Accounts. These financial tools provide their holders with tax benefits for contributions and withdrawals as long as certain conditions are met.

Peter Thiel, a billionaire, is an example of the successful use of a Roth IRA. In 1999, he contributed USD 2,000 to this account and bought about 1,700,000 PayPal shares for USD 1700. Later, he invested in Facebook and eBay through his Roth IRA. Over several decades, his investments grew to USD 5,000,000,000. Once he turns 59.5 years old, Peter Thiel will be able to withdraw this amount from his account and avoid any resulting taxes.

Retirement accounts come with certain limits, and it is important to keep them in mind. For instance, the Roth IRA had an annual contribution limit of USD 6,000 to USD 7,000 in 2021. To reduce tax liabilities even further, billionaires often turn to whole life insurance or universal life insurance policies. These policies involve making periodic contributions to a dedicated account, enabling the accumulation of substantial sums of money. The latter can be withdrawn after a set period. One of the advantages of these accounts is that you avoid taxes on the interest earned.

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Expense write-off

Canada’s tax laws offer unique opportunities for freelancers and remote workers to reduce their tax burden by claiming work-related expenses, such as rent, utilities, and internet costs. These deductions can help to lower the taxable income significantly and, ultimately, reduce the amount of tax they have to pay.

Many billionaires take advantage of the tax-saving strategy with large expenses. Say, Ty Warner, the creator of Beanie Babies, purchased several high-end Four Seasons hotels, which allowed him to legally avoid paying taxes on income for over a decade. This tactic demonstrates how wealthy individuals can leverage their spending power to reduce tax liabilities significantly or avoid them altogether.

Billionaires report expenses for various items in their tax filings, including sports team purchases, expenses for buying cars, yachts, boats, and airplanes, education expenses, and property maintenance. These expenses are often deductible, which allows billionaires to reduce their taxable income by a considerable amount. They can deduct losses from commercial activities, and these losses can be carried over to future years, thereby reducing the overall tax burden.

To gain a deeper understanding of how billionaires successfully avoid paying taxes, the strategies they employ to reach personal objectives, and how you can apply similar tactics to your situation to avoid taxes, feel free to reach out to the International Wealth team for a free consultation at info@offshore-pro.info. Our specialists will help you establish a framework that will bolster your privacy, safeguard your investments, and enhance the effectiveness of your global pursuits. Below, you can find some of the services we offer to our customers:

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