By Elizabeth Dilts Marshall

NEW YORK, (Reuters) – As Congress considers approving its $1.75 trillion spending plan this week, rich individuals have already begun to devise ways to avoid having to pay for it.

Expected to vote in this week’s U.S. House of Representatives on Democrats’ social-spending bill, the House will set the stage for the Senate to follow suit.

This package will be the largest expansion of America’s safety net since 1960s. Democrats plan to pay for it with a 5% surtax on people earning more than $10million annually and a further 3% tax on those with incomes greater than $25 million.

The White House claims that the surtax will generate $230 Billion to fund the spending bill. Experts and bankers however say that most people will be able to get around it. It will also raise less money than the earlier billionaire tax.

Professor of Economics at University of California at Berkeley, Emmanuel Saez said, “Even though it looks like it raises sharply taxes on ultra millionaires, it’s actually not going to bite as hard.”

In recent weeks, the proposed tax on billionaires, which would affect roughly 700 Americans, has been in the news and generated frustration from Elon Musk, who is world’s wealthiest man.

The proposal to tax unrealized shares gains was dropped by moderate Democrats who argued that it unfairly targets wealth creators.

Despite that, Musk sought to get ahead of any future Democratic plans to hike taxes by selling https://www.reuters.com/business/musks-5-billion-tesla-stock-haul-has-charity-circuit-buzzing-2021-11-12 $6.9 billion in Tesla (NASDAQ:) Inc stock last week.

It is not known what the exact details are of the House’s bill. Academics, bankers and lawyers expect the bill to contain the White House’s proposed surtax increase of up-to 8%. However, it won’t include the billionaires tax.

Alvina Lo from Wilmington Trust, chief wealth planner, stated that wealthy taxpayers can plan for the surtax easily.

Lo explained that Lo’s goal is for your adjusted modified gross income to be below the threshold. Taxes will not apply.

According to Lisa Featherngill, Comerica Bank’s national director for wealth planning, the billionaires tax “would have proved very difficult to avoid.”

The levy could have been applied to those with assets exceeding $1 billion and individuals who earn more than $100,000,000 for the past three years. In order to avoid this tax, the individuals would have needed to lower their incomes or assets by at minimum half.

Featherngill explained that $500 million can be difficult if one has a billion assets.

S CORPS & C CORPS

Many wealthy individuals are trying to lower their personal incomes below $10 million for 2022. They do this by shifting the earnings from S corporations to C corporations, or passing through tax structures.

Wall Street investors as well as owners of private equity and hedge fund companies love S corporations. The structure permits them to deduct their business income as personal income and avoid the corporate income tax.

S corps will be taxed at the top at 48.8% Federal level and more than 60% in California, New York, when added to state income taxes.

By switching their S corporation tax structures to a C corporation, wealthy individuals should be able to keep their annual personal income below the $10 million threshold – although the downside is those earnings must be retained in the business, where they will pay a corporate tax of 21%.

STOCK SALES

Bankers report that wealthy individuals have also sold stock in this year’s surtax and are planning to spread future sales out over many years, so they don’t reach the $10 million threshold.

Lo explained that while individuals may still have to pay capital gains or investment income taxes of up 23.8%, it is much less than the 31.8% tax which the top income earners will pay next year, if Lo’s spending bill is approved.

The extent to which Democratic legislators are conscious of these loopholes is unknown.

Frank Clemente is the executive director at Americans for Tax Fairness. He said that while the tax surcharge was an improvement, it wasn’t enough.

He said that “the millionaires surtax doesn’t fix the problem with unrealized capital gains.” The billionaires’ income tax would, however, solve the tax-free scandal of billionaires.