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The wealthy may avoid $163 billion in annual taxes. How they do it


Jeff Bezos, left, and Elon Musk

Getty Images; Reuters

The wealthiest Americans may be dodging as much as $163 billion in income taxes every year, according to the U.S. Department of the Treasury, and many leverage tax laws to do it legally, financial experts say.

The U.S. tax levies rise with income but the super-wealthy can often evade the tax code and reduce their owing. And some billionaires, such as Amazon founder Jeff Bezos and Tesla CEO Elon Musk, pay little to no taxes compared to their wealth, a ProPublica report found. 

Sharif Muhammad (certified financial planner) said that as long as one follows the law, all is fair. He founded Unlimited Financial Services, Somerset, New Jersey. 

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While most Americans earn money through labor, such as salaries and benefits, the super affluent may receive income from interest, dividends, capital gains or rent, from investments, known as capital income.  

Most Americans cover their taxes using their paychecks. But the 1 percent may not receive income from their tax returns. They can sell investments later or offset capital gains with losses.

Muhammad explained that an executive might receive stock-based compensation and, when they are ready to retire, may also sell their other losses investments to reduce their tax growth.

Another popular tactic, asset-based lending, allows the wealthy to borrow money against their portfolio when they need cash, eliminating the need to sell appreciated investments that may incur gains. The portfolio loan isn’t taxable and can’t be reported on your taxes. 

Muhammad explained that it was probably one of their most important ways to avoid the IRS’s attention.

Wealthy people often keep assets up to death and avoid capital gains tax by passing on property to their heirs. A “step up in basis” is a method by which the value of inherited property adjusts to its current value on the day of death.

President Joe Biden has called for taxing gains at death, with an exemption for growth less than $1 million for single filers and $2.5 million for married couples. However, House Democrats dropped the measure from their $3.5 trillion spending plan last week.

Wealth transfer taxes

It’s not just about income tax for the super-wealthy. Wealth transfer tax is equally crucial.

Lisa Featherngill

Director of wealth planning at Comerica Wealth Management

In the meantime, wealthy families are making gifts to reduce their taxable estates ahead of the 2026 deadline, Featherngill said. 

You can also make estate plans, like so-called Dynasty Trusts. These trusts allow wealth to be passed from one generation to the next without incurring estate tax at every death.

House Democrats have proposed reeling in some of these popular techniques to help fund their budget plan.

Those who are philanthropic may also make charitable gifts, allowing donors to claim a federal write-off if they itemize tax deductions.

Donor-advised funds are a way for wealthy families to give over time. Featherngill explained that wealthy donors who desire more control could set up a private foundation.