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How Billionaires Legally Save on Taxes

Billionaires pay taxes – well, just like everyone else. However, the amount paid is incomparable with their actual fortune! According to experts, Warren Buffet’s fiscal burden amounted to just 0.1% in the period from 2014 to 2018, while Jeff Bezos and Michael Bloomberg have comparable figures – 0.98% and 1.3%, respectively. How do billionaires accumulate such wealth and pay so little to the state without infringing any laws? Well, that’s exactly what we are going to investigate.

Billionaires and Taxes

Legal Instruments and Strategies Used by Billionaires to Save on Taxes

Here are just a few examples of lawful strategies that may be used to reduce the tax burden, and they are actively used by billionaires:

  • Offshore tax havens. Some rich people and companies resort to offshore accounts in countries with lower tax rates. Billionaires store their funds in these jurisdictions, thus effectively reducing their tax burden.
  • Tax deductions. Interest on mortgage loans, charity donations, and business expenses are the examples of costs that are taxed at a lower rate. If they make up a considerable share of your spending, you considerably reduce the amount of taxable income.
  • Tax benefits. If you know the tax laws very well, you know the loopholes just as perfectly. For instance, a tax discount on children can directly decrease the amount of tax to be paid! This is the reason why billionaires always hire financial advisors to manage their funds.
  • Taxsaving instruments. Seeking to cut down on taxes by investing your money? Put it into certain accounts, such as 401(k) or an individual retirement account (IRA), or set up a trust to considerably reduce the tax base.

You may be interested to find out where billionaires keep their funds in 2023.

How Billionaires Use the Offshores

Offshore tax havens are the countries or territories that offer low or zero taxes for foreign individuals and companies. They can be used to reduce fiscal burden by transferring income or assets to local institutions. Here are some popular ways of using offshore tax havens:

  • Opening a bank account: billionaires can park their funds on a bank account opened in a tax haven, thus reducing the amount of taxes payable in their country of residence.
  • Company registration in a tax haven can help pay less income tax if you transfer the income to its accounts.
  • Last but not least, you can establish a trust to keep your assets in this structure, thereby minimizing the taxes payable on them.

Tax Burden Reduction: Strategies Shared by Billionaires

Let’s take a look at some tax optimization strategies used by billionaires in addition to tax havens:

  • Transfer pricing. It includes income and assets movement between related parties based in different countries to take advantage of lower tax rates. For example, a company can assign the intellectual property rights to its affiliated company in a tax haven and pay royalties to it for the use of such IP.
  • Double Taxation Treaty. Many tax havens have Double Taxation Treaties (DTTs) with other countries, which helps to reduce the total tax burden on income and assets. For example, a company can transfer its income to a tax haven that has a DTT with the country where it is based. That way, the amount of taxes payable in both jurisdictions may be considerably reduced.
  • Offshore trusts. A billionaire can set up a trust in a low-tax offshore jurisdiction and transfer his shares and bonds to it. These securities will yield profit, but the latter will not be subject to taxation.
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Using a Low-Tax Jurisdiction: Examples

A billionaire incorporates a company in a tax haven that offers low corporate tax rates, for example, in the Cayman Islands. His partners channel the revenue from other commercial enterprises they possess through this offshore company. The latter invests the funds received in various assets, such as shares or bonds.

The billionaire can postpone payment of the income profit tax on these assets until the income is repatriated to his country of residence, or he can leave the assets in the tax haven and solely pay the taxes from the income obtained there.

However, these companies are usually used to accumulate income from foreign sources that is not taxable in the majority of offshore jurisdictions.

Here is another example of how billionaires use the possibilities of countries with low tax rates: they assign the intellectual property object to a company registered in the British Virgin Islands. This legal entity will obtain passive income from tax-exempt royalty payments.

An important thing to note: the payment for the intellectual property object use is recognized as expenses, which reduces the taxable income in the home country.

There is one more option that is just as popular with billionaires: the companies registered in low-tax countries and territories are used to own real estate. The disclosure of UK registers showed that one third of foreign companies that own real estate is registered in the British Virgin Islands, while each fifth of them is formed in Jersey.

We would like to emphasize that these are just a few examples of tax optimization that can be realized in low-tax countries and territories. The peculiarities of these solutions may differ considerably depending on the particular individual or corporate needs, as well as the fiscal laws of relevant countries.

Top 10 Ways Used by Billionaires to Reduce Taxes

The superrich possess a wide variety of accessible instruments that help to save on taxes. Unfortunately, only some of them are available to people with average income.

Effect of Superwealth

American billionaires use the tax optimization strategy which means that they ensure an explosive growth in their assets, such as shares and real estate. Under US laws, they are not taxable until the entrepreneurs sell their assets.

According to Forbes, the fortune of 25 billionaires increased by $401 billion from 2014 to 2018, and the amount of income tax they paid was a mere $13.6 billion. Simple calculations will give us an efficient taxation rate equaling 3.4%.

Meanwhile, billionaires can use their wealth as a collateral to take a loan. As you probably know, loans are not subject to tax, and they are not mentioned in the tax return. Looks good, doesn’t it?

Retirement Accounts

There are special retirement accounts in many countries that can be used to save your funds for senior age. The money deposited on these accounts can bring investment and interest income that is not subject to taxation. 

Peter Thiel, a billionaire, used a Roth IRA account to accumulate $5 billion. How on Earth has he done that? Well, he deposited cheap company shares on this account back in 1999, and it later became what we know today as PayPal.

Change of Income Type

Income from long-term investments (such as the sale of shares) is taxed at a lower rate. But what should you do if your annual income exceeds $1 billion a year and is mainly generated by short-term trading? You would do the right thing if you change the type of income. Jeffrey S. Yass, a billionaire who is a founder and CEO of Susquehanna International Group, managed to save $1 billion in 6 years in this way.

You may be interested to find out that the investment income in the US has a relatively low capital gains tax if investments are held for more than one year (0%, 15%, or 20%, depending on the income and tax status). At the same time, the income rate on short-term income may reach 37%.

Buying a Sports Team

The Tax Code offers business owners a lot of ways to reduce taxable income with the help of deductions. The most interesting case is the buying of the Los Angeles Clippers (a sports team) by Steve Ballmer, the former Microsoft CEO.

It does not really matter whether the team brings any profit or its cost is rising. What is important is that the expenses on its maintenance can be deducted from the income. These may include contracts with players, writing off obsolete equipment, and so on. As a result, you save on taxes, and your capital is growing at the same time.

Use of Industries with Substantial Tax Incentives

The US provides a lot of incentives in real estate, oil and gas production industries, and so on. It means that wealthy people who own such companies may reduce their taxable income.

A skillful strategy of using expenses and deductions helped some billionaires avoid income tax payment for many years. For instance, Stephen Ross, a large American developer, earned $111.5 billion from 2008 to 2017. However, he also declared about $2 billion losses in his tax returns. The result? He didn’t pay any federal income tax in the specified period!

According to the Institute on Taxation and Economic Policy, at least 55 largest corporations in America did not pay the federal corporate income tax in 2020 on legal grounds.

Deductions on Expensive Hobbies and Side Projects

Deductions from hobbies and side projects that the superrich can structure as a business is yet another interesting way of saving on taxes. For example, the expenses on keeping thoroughbred race horses can be deducted from the taxable income and thus reduce fiscal liabilities.

Moreover, you can invest in side projects. For instance, Ty Warner (the founder of Beanie Babies) bought several Four Seasons iconic establishments and didn’t pay the income tax for 12 years.

Change of Tax Legislation

Billionaires can influence the leading politicians and lobby the laws that will be advantageous for them.

Use of Trusts for Inheritance

The rich often remain the legal owners of their assets until they die, and then they transfer their wealth to the heirs. This helps to avoid capital gains tax, and if the inheritance procedure is organized with the help of trusts, the inheritance tax also equals zero. Some rich dynasties pass down their property from generation to generation using such structures, and it helps them to save considerable amounts and increase their wealth.

Do you feel like finding a good solution for yourself to save on taxes? We are here to help you. International Wealth specialists have all the knowledge and practical experience that will prevent additional expenses and help you choose the best strategy of those available. 

All billionaires rely on their financial advisors as they help to solve problems more quickly and have the professional flair formed by years of experience. So have we!

If you want to know more on how to choose the best strategy of saving on taxes or you intend to organize a business structure to own assets, please write to us at [email protected]

Pay taxes wisely!

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